In September 2001 swap dealers were quoting a rate for five-year euro interest-rate swaps of 4.5 percent

Question:

In September 2001 swap dealers were quoting a rate for five-year euro interest-rate swaps of 4.5 percent against euribor (the short-term interest rate for euro loans). Euribor at the time was 4.1 percent. Suppose that A arranges with a dealer to swap a a10 million five-year fixed-rate loan for an equivalent floating-rate loan in euros.

a. What is the value of this swap at the time that it is entered into?

b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 1 percent. Who gains and who loses?

c. What is now the value of the swap?

Dealer
A dealer in the securities market is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price). A dealer seeks to profit from the spread between the...