On March 1st, 2018, Firm A decides to enter a semi-annual, 2-year interest rate swap with Bank
Question:
On March 1st, 2018, Firm A decides to enter a semi-annual, 2-year interest rate swap with Bank B, the notional being 1 million USD. The continuously compounded interest rates on March 1st, 2018 are as below:
Maturity 0.5 1 1.5 2
Interest rate 0.2107 0.1625 0.1488 0.1438
One year later, on March 1st, 2019, the continuously compounded interest rates change to:
Maturity 0.5 1 1.5 2
Interest rate 0.5754 0.3567 0.2872 0.2554
a. On March 1st, 2018, what is the continuously compounded forward rate over March 1st, 2019 to September 1st, 2019?
b. On March 1st, 2018, if you find the forward price of six-month zero-coupon bond over March 1st , 2019 to September 1st is lower than that the fair price, describe the arbitrage strategy using onthe-run zero-coupon bonds.
c. What is the swap rate that Firm A and Bank B agree on?
d. What is the value of the swap position for the floating-rate payer on March 1st, 2019 after the exchange of payments?
e. What is the dollar duration of the swap on March 1st, 2018 after the exchange of payments?
Advanced Accounting
ISBN: 978-1305084858
12th edition
Authors: Paul M. Fischer, William J. Tayler, Rita H. Cheng