Show that V 1 + f = V 2 where V 1 is the value of a
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Show that V1 + f = V2 where V1 is the value of a swaption to pay a fixed rate of Rk and receive LIBOR between times T1 and T2, f is the value of a forward swap to receive a fixed rate of Rk and pay LIBOR between times T1 and T2, and V2 is the value of a swaption to receive a fixed rate of Rk between times T1 and T2. Deduce that V1 = V2 when Rk equals the current forward swap rate.
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We prove this result by considering two portfolios The first consists of the swap option to receive ...View the full answer
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