The one year spot interest rate is 5%. The two and three year spot rates are 5.5%
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Question:
The one year spot interest rate is 5%. The two and three year spot rates
are 5.5% and the four year spot rate is 6%. What is the fair swap rate for a
4 year fixed-for-floating swap, assuming a notional principal of $ 10 million
and annual payments? Explain why the rate that you have derived is ‘fair’
to both counterparties.
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