Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 26, Problem 20PS
a.
Summary Introduction
To compute: The value of swap at the time of entering and whether it is reasonably priced.
b.
Summary Introduction
To discuss: The person who will get gain and who will get a loss from the contract.
c.
Summary Introduction
To compute: The value of swap for each 1000 of notional value.
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In September 2020, swap dealers were quoting a rate for five-year euro interest-rate swaps of 5.4% against Euribor
(the short-term interest rate for euro loans). Euribor at the time was 5.0%. Suppose that A arranges with a dealer to
swap a €10 million five-year fixed-rate loan for an equivalent floating-rate loan in euros, answer the following: (Leave
no cells blank - be certain to enter "O0" wherever required.)
a. Assume the swap is fairly priced. What is the value of this swap at the time that it is entered into?
Swap value
b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 2.0%. Who gains
and who loses?
Dealer gains; A loses
A gains; Dealer loses
c. What is now the value of the swap to A for each €1,000 of par value? (A negative answer should be indicated by
a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Swap value
In September 2020, swap dealers were quoting a rate for five-year euro interest-rate swaps of 4.5% against Euribor (the short-term)
interest rate for euro loans). Euribor at the time was 4.1%. Suppose that A arranges with a dealer to swap a €10 million five-year fixed-
rate loan for an equivalent floating-rate loan in euros, answer the following: (Leave no cells blank - be certain to enter "0" wherever
required.)
a. Assume the swap is fairly priced. What is the value of this swap at the time that it is entered into?
Swap value
b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 1%. Who gains and who loses?
Dealer gains; A loses
O A gains; Dealer loses
c. What is now the value of the swap to A for each €1,000 of par value? (A negative answer should be indicated by a minus sign. Do
not round intermediate calculations. Round your answer to 2 decimal places.)
Swap value
Suppose the spot price of a euro in dollars is $0.932. The U.S. interest rate for 90 days is 6.875% and the euro rate for 90 days is 4.450%. All interest calculations are done as rate times (#days/360).
a. What is the rate for a 90-day forward contract on the euro?
b. Suppose the euro forward contract is currently quoted at $0.95. What
type of transaction(s) should an arbitrageur conduct to take
advantage of the apparent mispricing
Only typed answer
Chapter 26 Solutions
Principles of Corporate Finance
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 8PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Futures prices In December 2017, six-month futures...
Ch. 26 - Prob. 11PSCh. 26 - Prob. 13PSCh. 26 - Prob. 15PSCh. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Convenience yield In March 2018, six-month bitcoin...Ch. 26 - Prob. 19PSCh. 26 - Prob. 20PSCh. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 22PSCh. 26 - Prob. 23PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 26PSCh. 26 - Prob. 27PSCh. 26 - Prob. 28PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - Prob. 33PSCh. 26 - You are a vice president of Rensselaer Advisers...
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