A bank enters into a 3-year swap with company X where it pays LIBOR and receives 3.00%. It enters into an offsetting swap with company Y where is receives LIBOR and pays 2.95%. Which of the following is true:
A. If company X defaults, the swap with company Y is null and void
B. If company X defaults, the bank will be able to replace company X at no cost
C. If company X defaults, the swap with company Y continues
D. The bank's bid-offer spread is 0.5 basis points
C
The bank`s bid-offer spread is 5 basis points not 0.5 basis points. The bank has quite separate transactions with X and Y. If one defaults, it still has to honor the swap with the other.
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