The value of the FRN

问题如下：

The issuer of the floating-rate note B4 is in the energy industry. Ibarra personally believes that oil prices are likely to increase significantly within the next year, which will lead to an improvement in the firm’s financial health and a decline in the probability of default from 1.50% in Year 1 to 0.50% in Years 2, 3, and 4. Based on these expectations, which of the following statements is correct?

选项：

The CVA will decrease to €22.99.

The note’s fair value will increase to €1,177.26.

The value of the FRN, assuming no default, will increase to €1,173.55.

解释：

Correct Answer: A

The changing probability of default will not affect the binomial tree prepared in the solution to Question (6). The Date 1 value remains €1,154.27, which is also the VND. The expected exposures, loss given default, and discount factors are also unaffected by the changing probability of default. The following is the completed credit valuation adjustment table.

Thus, CVA decreases to €22.99.