In September 2014 swap dealers were quoting a rate for five-year euro interest-rate swaps of 4.5% against

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In September 2014 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.

a. What is the value of this swap at the time that it is entered into?

b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 1%. Who gains and who loses?

c. What is now the value of the swap?


Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the...
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Principles of Corporate Finance

ISBN: 978-0077404895

10th Edition

Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen

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