Question: Given the interest rate swap quotes below (all quotes are fixed against the floating LIBOR with principle of 1million): Sterling Years Bid Ask 1 0.63

Given the interest rate swap quotes below (all quotes are fixed against the floating LIBOR with principle of 1million):

Sterling

Years Bid Ask

1 0.63 0.66

2 0.91 0.95

3 1.11 1.15

4 1.28 1.33

5 1.42 1.47

a.If you speculate that the interest rate on the British pound is going to increase over the next 3 years, what would you do to profit from such a speculation? Please draw a graph and be specific in articulating buy or sell what and receive or pay what rate etc.

b. If a year later, LIBOR on GBP is 1.12%, then at that time, what is your profit(loss) per contract?

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