Suppose that, under the terms of a swap, a swap dealer has agreed to pay 6-month LIBOR and receive 6% per year (with semiannual compounding) on a notional principal of $20 million.  The swap has a remaining life of 1.25 years.  The appropriate LIBOR discount rates with continuous compounding for 3-month, 9-month, and 15-month maturities are 4%, 5%, and 6%, respectively.  The 6-month LIBOR rate at the last payment date was 4.5% per year (with semiannual compounding).  Answer the following questions.

 

A.  Value the swap from the dealer's perspective. 

B.  Compute the value of the swap from the counterparty's perspective, i.e., from the perspective of the dealer's customer who has agreed to pay the dealer 6% fixed in return for 6-month LIBOR.

Answer rating: 100% (QA)

A To value the swap from the dealers perspective we need to calculate the fixed rate payments and fl... View the full answer