Ferris wished to execute a swap to take advantage of her expectation of a yield curve shift
Question:
Ferris wished to execute a swap to take advantage of her expectation of a yield curve shift and believes that any difference in credit spread between LIBOR and U.S. Treasury market rates will remain constant.
a. Describe a six-month U.S. dollar LIBOR-based swap that would allow Ferris to take advantage of her expectation. Discuss, assuming Ferriss expectation is correct, the change in the swaps value and how that change would affect the value of her portfolio. [No calculations required to answer part a.] Instead of the swap described in part a, Ferris would use the following alternative derivative strategy to achieve the same result.
b. Explain, assuming Ferriss expectation is correct, how the following strategy achieves the same result in response to the yield curve shift.
c. Discuss one reason why these two derivative strategies provide the same result.
International Financial Management
ISBN: 978-0078034657
6th Edition
Authors: Cheol S. Eun, Bruce G.Resnick