Question: Explain how you would value a swap that is the exchange of a floating rate in one currency for a fixed rate in another currency.

Explain how you would value a swap that is the exchange of a floating rate in one currency for a fixed rate in another currency.

The LIBOR zero curve is flat at 5% (continuously compounded) out to 1.5 years. Swap rates for 2- and 3-year semiannual pay swaps are 5.4% and 5.6%, respectively. Estimate the LIBOR zero rates for maturities of 2.0, 2.5, and 3.0 years. (Assume that the 2.5-year swap rate is the average of the 2- and 3-year swap rates and use LIBOR discounting.)

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