A $100,000 interest rate swap has a remaining life of 10 months. Under the terms of the swap, six-month LIBOR is exchanged for 4% per annum (compounded semi-annually). Six-month LIBOR forward rates for all maturities are 3.3% (compounded semi-annually). The six-month LIBOR rate was 2.6% two months ago. The risk free rate is 2.7% (cont. comp) for all maturities. What is the value of the swap to the party paying floating? (Required precision: 0.01 +/- 1)

A $100,000 interest rate swap has a remaining life of 10 months. Under the terms of the swap, six-month LIBOR is exchanged for 4% per annum (compounded semi-annually). Six-month LIBOR forward rates for all maturities are 3.3% (compounded semi-annually). The six-month LIBOR rate was 2.6% two months ago. The risk free rate is 2.7% (cont. comp) for all maturities. What is the value of the swap to the party paying floating? (Required precision: 0.01 +/- 1)

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 2P: The nominal yield on 6-month T-bills is 7%, while default-free Japanese bonds that mature in 6...

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Suppose that a bank has agreed to the following terms of an interest rate swap:- The notional principal is CAD 300 million and the remaining life of the swap is 11 months.- The bank pays 8% per annum, and receives three-month LIBOR.- Payments are exchanged every three months.- The swap (fixed) rate is 11% per annum for all maturities.- The three-month LIBOR rate a month ago was 12.5% per annum. All rates are compounded quarterly. Estimate the value of the swap using a) a bond-price valuation method, and b) a FRAs-based method?
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Tango Bank has contracted to lend $80 million to Delta Co. in three months’ time. This loan will be for a period of six months. To hedge against the risk of interest rates dropping, Tango has purchased an interest rate put option. The put option has an exercise rate of 2.15% and a maturity of three months. The underlying forward rate is based on the LIBOR, which has a current term structure of # days LIBOR 90 2% 270 2.3% The terms of the LIBOR specify 30 days in a month and 360 days in a year. The volatility on the underlying forward rate is 0.25. Tango uses the Black Model to estimate the call premium. c. Hindsight being 20-20, should Tango have purchased the put option?
Tango Bank has contracted to lend $80 million to Delta Co. in three months’ time. This loan will be for a period of six months. To hedge against the risk of interest rates dropping, Tango has purchased an interest rate put option. The put option has an exercise rate of 2.15% and a maturity of three months. The underlying forward rate is based on the LIBOR, which has a current term structure of # days LIBOR 90 2% 270 2.3% The terms of the LIBOR specify 30 days in a month and 360 days in a year. The volatility on the underlying forward rate is 0.25. Tango uses the Black Model to estimate the call premium. b. Suppose that in three months’ time, the six-month LIBOR turns out to be 2%. What is the annualized rate of return on Tango’s position with the put option?
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