Problem $1$

positive value to one party and a negative value to the other $-$ ti zero$-$sum game, is should be observed that the floating rate is set at the beginning of each period, but paid

at the end $=$ thus, the first floating cash flow will be fixed at the outset of the swap. The second key principle to tale away from this problem is to reconnize that swaps can

be valued in one of two ways: $($i$)$ as a portfolfo of Forward Rate Agrements $($FRAs$),$ or $($ii$)$ as the difference in the prices of a floating$-$rate bond and a fixed$-$rate bond. A

paying $($or receiving$)$ fixed rate, the finanoial manager can pay $($or receive$)$ a floating rate.

In a three$-$year interest rate swap, a financial institution agrees to pay a fixed rate per annum and to receive six$-$month LIBOR in return on a notional principal of $$10$ million

with payments being exchanged every six months.

Complete the tables below in order to calculate the swap rate when the financial institution enters into the contract. $($At this time, the value of the swap should be $$0.)$

Calculation of Forward Rates

$R_c=mln(1+\frac{R_m}{m})$

$[R_F=\frac{R_2{T}_2-R_1{T}_1}{T_2-T_1},R_m=m(e^{\frac{f_F}{m}}-1)]$

Hint: Use Goal seek in find the swop nate that sets the intitiol value of the swop equal to zero.

Three months after the swap is initiated, the LIBOR rates have changed, as shown in the table below. $($Yields have shifted upwards, and th

Complete the tables below to find the value of the swap at this time from the financial institution's perspective.

Calculation of New Forward Rates

Calculation of Swap Rate

yield curve has flattened.$)$

Calculation of Value of the Swap