Historical simple forward rates R(Ti,Tj) (in fact GBP LIBOR rates recorded during a six-month period in...

  

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Historical simple forward rates R(Ti,Tj) (in fact GBP LIBOR rates recorded during a six-month period in 2009) are given in the following table (for example, R(T1, T6) = 1.33000%): To (1 Jun) T₁ (1 Jul) T2 (1 Aug) 0.67063% 1.06563% 0.64938% 1.27250% 0.97500% 0.58250% 1.35125% 1.17750% 0.69000% 1.25625% 0.88250% 1.33000% 0.96375% T₁ (1 Jul) T2 (1 Aug) T3 (1 Sep) T4 (1 Oct) T5 (1 Nov). 1.42250% T6 (1 Dec) 1.48438% Use these rates to compute: T3 (1 Sep) T4 (1 Oct) T5 (1 Nov) 0.53000% 0.56125% 0.68000% 0.50125% 0.50750% 0.51313% (a) The swap rate quoted on 1 June for an interest rate swap settled in arrears starting on 1 June, with 6 monthly coupon settlement dates falling on the 1st day of each month from July till December inclusive, the floating leg of the swap contract paying interest at the appropriate simple forward rate. (20 marks) (b) The cash flow for the fixed leg and floating leg of this interest rate swap on a £100 principal. (10 marks) (c) The balancing payment received or made when closing a payer posi- tion in the above swap on a £100 principal on 1 September. (10 marks) Historical simple forward rates R(Ti,Tj) (in fact GBP LIBOR rates recorded during a six-month period in 2009) are given in the following table (for example, R(T1, T6) = 1.33000%): To (1 Jun) T₁ (1 Jul) T2 (1 Aug) 0.67063% 1.06563% 0.64938% 1.27250% 0.97500% 0.58250% 1.35125% 1.17750% 0.69000% 1.25625% 0.88250% 1.33000% 0.96375% T₁ (1 Jul) T2 (1 Aug) T3 (1 Sep) T4 (1 Oct) T5 (1 Nov). 1.42250% T6 (1 Dec) 1.48438% Use these rates to compute: T3 (1 Sep) T4 (1 Oct) T5 (1 Nov) 0.53000% 0.56125% 0.68000% 0.50125% 0.50750% 0.51313% (a) The swap rate quoted on 1 June for an interest rate swap settled in arrears starting on 1 June, with 6 monthly coupon settlement dates falling on the 1st day of each month from July till December inclusive, the floating leg of the swap contract paying interest at the appropriate simple forward rate. (20 marks) (b) The cash flow for the fixed leg and floating leg of this interest rate swap on a £100 principal. (10 marks) (c) The balancing payment received or made when closing a payer posi- tion in the above swap on a £100 principal on 1 September. (10 marks)

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SOLUTION a The swap rate quoted on 1 June for an interest rate swap settled in arrears starting on 1 June with 6 monthly coupon settlement dates falling on the 1st day of each month from July till Dec... View the full answer