The date is January 3, 2012 and you just returned to work from a 100 thorough and
Question:
The date is January 3, 2012 and you just returned to work from a 100 thorough and exhausting celebration of the New Year. As a junior clerk on the USD fixed- income derivative desk your first transaction of the year involves a 5Y fixed-for-floating swap
with yearly payments on $100m notional. Bloomberg provides you with the following data:
Payment Dates (years)
1.0 2.0 3.0 4.0 5.0
T-Strip Prices P (0, T)
95.39 90.63 85.78 80.93 76.11
(a) In terms of cash-replication, the above 5Y plain vanilla swap corresponds to holding what positions in what type of instruments?
(b) How much is the swap worth at inception?
(c) Calculate the 5Y swap rate for an annual fixed-for-floating USD swap. What is an appropriate bid-ask spread assuming that the Bloomberg data are midpoints?
Expert Answer:
