Swaptions, suppose you are an Australian company and have ongoing floating-rate debt. You have profited for some
Question:
Swaptions, suppose you are an Australian company and have ongoing floating-rate debt. You have profited for some time by paying at a floating rate because rates have been falling steadily for some time for the last few years. Now, however, you are concerned that within three months the Australian central bank may tighten its monetary policy and your debt costs will thus increase. Rather than lock in your borrowing via a swap, you prefer to hedge by buying a swaption expiring in three months, whereby you will have the choice, but not the obligation, to enter a five-year swap locking in your borrowing costs. The current three-month forward, five-year swap rate is 2.65%. The current five-year swap rate is 2.55%. The current three-month Rf is 2.25%.
- What is the time to expiration for valuing the swaption using the Black Model?
- What is the Rf for valuing the swaption using the Black Model?