Suppose that the LIBOR yield curve is flat at 8% with annual compounding. A swaption gives the

Question:

Suppose that the LIBOR yield curve is flat at 8% with annual compounding. A swaption gives the holder the right to receive 7.6% in a five-year swap starting in four years. Payments are made annually. The volatility of the forward swap rate is 25% per annum and the principal is $1 million. Use Black’s model to price the swaption. Compare your answer to that given by DerivaGem.