A financial institution has agreed to pay 6-month LIBOR and receive 3% per annum on principal...

 

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A financial institution has agreed to pay 6-month LIBOR and receive 3% per annum on principal of $100 million. The payments take place every 6 months. The LIBOR rates with continuous compounding are given by the table below: Months LIBOR from Today 3 5.00% 6 5.50% 9 5.50% 12 5.75% 15 6.00% 18 6.50% 21 6.80% 24 7.00% The 6-month LIBOR rate at the time of the last payment date was 5% (with semi- annual compounding). Required: a) What is the value of this swap to the financial institution if the swap has remaining life of 1.25 years? Please use bond valuation methods with continuous compounding. (3 marks) b) What is the value of this swap to the financial institution if the swap has remaining life of 1.5 years? Please use bond valuation methods with continuous compounding. A financial institution has agreed to pay 6-month LIBOR and receive 3% per annum on principal of $100 million. The payments take place every 6 months. The LIBOR rates with continuous compounding are given by the table below: Months LIBOR from Today 3 5.00% 6 5.50% 9 5.50% 12 5.75% 15 6.00% 18 6.50% 21 6.80% 24 7.00% The 6-month LIBOR rate at the time of the last payment date was 5% (with semi- annual compounding). Required: a) What is the value of this swap to the financial institution if the swap has remaining life of 1.25 years? Please use bond valuation methods with continuous compounding. (3 marks) b) What is the value of this swap to the financial institution if the swap has remaining life of 1.5 years? Please use bond valuation methods with continuous compounding.

Answer rating: 100% (QA)

To calculate the value of the swap we need to determine the present value of the future cash flows from the swap using bond valuation methods with con... View the full answer