4. Let T = for i = 0, 1, 2,..., 20 and let p; [2] denote...
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4. Let T₁ = for i = 0, 1, 2,..., 20 and let p; [2] denote the nominal spot rate that will prevail at time T; for borrowing and investing between times T; and Ti+1. Consider a nonstandard interest rate swap between two parties A and B in which the roles of receiveing fixed and floating payments will interchange half way through the swap. More precisely: At each of the times T; with i=1,2,..., 10 A pays B the variable amount FP-12 and B pays A the fixed amount F2. At each of the times T; with i= 11, 12,..., 20 A pays B the fixed amount F2 and B pays A the variable amount FP-1[2] The (constant) swap rate q[2] is chosen so that neither party pays anything to enter the agreement (at time t = 0) and the notional principal F is never paid. Find an expression for the swap rate q[2] in terms of the discount factors d(.5), d(1), ..., d(10). 4. Let T₁ = for i = 0, 1, 2,..., 20 and let p; [2] denote the nominal spot rate that will prevail at time T; for borrowing and investing between times T; and Ti+1. Consider a nonstandard interest rate swap between two parties A and B in which the roles of receiveing fixed and floating payments will interchange half way through the swap. More precisely: At each of the times T; with i=1,2,..., 10 A pays B the variable amount FP-12 and B pays A the fixed amount F2. At each of the times T; with i= 11, 12,..., 20 A pays B the fixed amount F2 and B pays A the variable amount FP-1[2] The (constant) swap rate q[2] is chosen so that neither party pays anything to enter the agreement (at time t = 0) and the notional principal F is never paid. Find an expression for the swap rate q[2] in terms of the discount factors d(.5), d(1), ..., d(10).
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To find an expression for the swap rate q2 in terms of the discount factors d5 d1 d10 we can conside... View the full answer
Related Book For
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
Posted Date:
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