Compute the initial price of a swaption that matures at time t =5 and has a strike
Question:
Compute the initial price of a swaption that matures at time
t =5 and has a strike of 0. The underlying swap is the same swap as described in the previous question with a notional of 1 million. To be clear, you should assume that if the swaption is exercised at
t =5 then the owner of the swaption will receive all cash-flows from the underlying swap from times
t = 6
t =6 to
t = 11
t =11 inclusive. (The swaption strike of 0 should also not be confused with the fixed rate of 4.5% on the underlying swap.)
Underlying Swap: initial value of a forward-starting swap that begins at t =1, with maturity t =10 and a fixed rate of 4.5%. (The first payment then takes place at t =2 and the final payment takes place at t =11 as we are assuming, as usual, that payments take place in arrears.) You should assume a swap notional of 1 million and assume that you receive floating and pay fixed.) is equal to 33,374
Fundamentals of Investment Management
ISBN: 978-0078034626
10th edition
Authors: Geoffrey Hirt, Stanley Block