Suppose a mortgage bank has agreed to a 100 million dollar worth mortgage loans maturity 10 years paying 8% fixed every year

Suppose also initially the mortgage bank has financed the requisite sum (the 100 million) via a purchased or wholesale fund with three months maturity carrying the LIBOR rate currently 7.5%

Obviously for every three month period if LİBOR goes above 7.5% our mortgage bank loses (if it goes above 8% it truly loses); whereas if LİBOR goes below 7.5% our mortgage bank gains.

Our mortgage bank does not like such UNCERTAİNTY. Enter a swap dealer making the following offer: let us swap "some benefits and obligations".

Thus you mortgage bank give me namely turn over to me

100mill*0.075=750,000 dollars every year. In return, I (swap dealer) will take the responsibility to pay the LIBOR (whatever it may be) to the wholesale fund's provider to renew the wholesale fund provision.

Let's say they agree.

Suppose during year 2 first quarter the 3 months LIBOR rate turns out to be 8%.

a) How much will money will the mortgage bank give to the swap dealer?

b) How much will money will the swap dealer pay to the wholesale fund's provider? Suppose during year 4 third quarter the 3 months LIBOR rate turns out to be 10%.

c) How much will money will the mortgage bank give to the swap dealer?

d) How much will money will the swap dealer pay to the wholesale fund's provider?

Answer rating: 100% (QA)

First of all the calculation shown in your excel at one place 100mill0075 750000 dollars is wro... View the full answer