Question 5: Interest Rate Swaps (2/10) Consider a 1 year fixed for floating interest rate swap...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Question 5: Interest Rate Swaps (2/10) Consider a 1 year fixed for floating interest rate swap with a notional value of $1. The floating leg is tied to three-month LIBOR with payments every quarter and payments in the fixed leg occur semiannually. Hence, the first floating rate payment is in 3 months and the first fixed rate payment is in 6 months. Table 1 gives you the spot LIBOR (annual, continuously compounding) at time 0. Table 1: Spot LIBOR Notation Maturity In Years LIBOR r0,0.25 0.25 0.100% r0,0.50 0.5 0.350% r0,0.75 0.75 0.600% r0,1.00 1 0.850% Consider LIBOR as proxy for the risk-free interest rate. (i) Suppose the fixed swap rate (annual, continuously compounding) is R and the realized LIBOR interest rate (annual, continuously compounding) from t to t is r,t (e.g. ro.75,1 is the interest rate from 0.75 years to 1 year), what is the payoff stream of short position (receiver of fixed interest) of the swap? (ii) To replicate the payoffs of (i), we can use FRAs. What are the fair forward interest rates (annual, simple) f0,0,0.25, f0,0.25,0.50, f0,0.50,0.75, and f0,0.75,1.00? Hint: for an interest rate, its simple term and continuous compounding term always satisfy 1+r simple exp(recxT). = Question 5: Interest Rate Swaps (2/10) Consider a 1 year fixed for floating interest rate swap with a notional value of $1. The floating leg is tied to three-month LIBOR with payments every quarter and payments in the fixed leg occur semiannually. Hence, the first floating rate payment is in 3 months and the first fixed rate payment is in 6 months. Table 1 gives you the spot LIBOR (annual, continuously compounding) at time 0. Table 1: Spot LIBOR Notation Maturity In Years LIBOR r0,0.25 0.25 0.100% r0,0.50 0.5 0.350% r0,0.75 0.75 0.600% r0,1.00 1 0.850% Consider LIBOR as proxy for the risk-free interest rate. (i) Suppose the fixed swap rate (annual, continuously compounding) is R and the realized LIBOR interest rate (annual, continuously compounding) from t to t is r,t (e.g. ro.75,1 is the interest rate from 0.75 years to 1 year), what is the payoff stream of short position (receiver of fixed interest) of the swap? (ii) To replicate the payoffs of (i), we can use FRAs. What are the fair forward interest rates (annual, simple) f0,0,0.25, f0,0.25,0.50, f0,0.50,0.75, and f0,0.75,1.00? Hint: for an interest rate, its simple term and continuous compounding term always satisfy 1+r simple exp(recxT). =
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
Explain why entrepreneurial firms are often in a strong position to use combination strategies.
-
Find the kinetic energy in joules of (a) A 0.145-kg baseball moving with a speed of 45 m/s and (b) A 60-kg jogger running at a steady pace of 9 min/mi.
-
_____ is making distinctions that harm people by using a persons membership in a protected class.
-
Draw four spanning trees of Graph \(A\) each of which includes edges \(v s, u v, w z\) and \(x y\). Use Graphs \(A, B\), and \(C\). Graph A Graph B Graph C
-
The following information is taken from the accounts of Latta Company. The entries in the T-accounts are summaries of the transactions that affected those accounts during the year. The overhead that...
-
Rents received as payment for use of real estate in which personal services are provided as an incidental part of a real estate dealers business are: Farm income, reported on Schedule F; not - for...
-
a. How (conceptually) is the discount rate for capital budgeting purposes defined and calculated? Is this number appropriate for analyzing the asset-replacement decision at hand? Why or why not? What...
-
Rundle Company reported the following operating results for two consecutive years: Required Compute each income statement component for each of the two years as a percent of sales. (Percentages may...
-
8. Brenda's uncle has given her the sum of $15 000 for her university education. Brenda expects to start university six years from now, when she estimates the cost will total $28 000. At what...
-
CaniRug will begin to produce and sell one-size-fits-all wigs in two colors: blonde and brunette. The brown wig is projected to be the better seller with sales of 100 wigs per week, whereas the...
-
In terms of Preferred stock as a financing option: What preferred stock is Why is preferred stock less risky for investors than common stock? Does preferred stock have tax advantages or...
-
During March, Hart Company incurred the following costs on Job 109 for the manufacture of 200 motors: Original cost accumulation: Direct materials Direct labor Factory overhead (150% of DL) Direct...
-
Calculate the cost of debt from the following information: company cost of capital = 15%, cost of equity capital = 16 per cent, D = $0.2 million, and V = $0.5 million.
-
How would I complete the following question in Microsoft Access: Create a Query - Order Master - Show Customer, Order Date, Country, Transit Claim, Driver. Select only items that are Walmart or...
-
What are the main distinctions between the different schools of legal interpretation?
-
Variable and fixed cost analysis; high-low method} Celsius Company manufactures a product that requires the use of a considerable amount of natural gas to heat it to a desired temperature. The...
-
On January 2, 20x6, the Healey Company made several long-term investments in the voting stock of various companies. It purchased 10,000 shares of Zima at $4.00 a share, 15,000 shares of Kane at $6.00...
-
Bon Company owns 40 percent of the voting stock of Macree Company. The investment account for this company on Bons balance sheet had a balance of $300,000 on January 1, 20xx. During 20xx, the Macree...
Study smarter with the SolutionInn App