The 3 year swap price on a new oat swap agreement is $5.94. Interest rates immediately rise
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Question:
The 3 year swap price on a new oat swap agreement is $5.94. Interest rates immediately rise on 1, 2, and 3-year zero coupon bonds from 5.1%, 5.4%, and 5.7% to 5.2%, 5.6%, and 6.0%, respectively. What is net swap payment per year if the reverse transaction occurs? Assume year 1, 2, and 3 forward prices are $2.05, $2.15, and $2.30, respectively and do not change.
A) $0.35
B) $0.49
C) $0.64
D) $0.75
Answer: B
Explain why the correct answer is B
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