Unsure 19 of 28 Unsure Answer Suppose that some time ago a financial institution entered into...
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Unsure 19 of 28 Unsure Answer Suppose that some time ago a financial institution entered into a swap, where it agreed to make semiannual payments at a rate of 3% per annum and receive LIBOR on a notional principal of $100 million. The swap now has a remaining life of 1.25 years. Payments will therefore be made 0.25, 0.75, and 1.25 years from today. The risk-free rates with continuous compounding for maturities of 3 months, 9 months, and 15 months are 5.2%, 5.7%, and 6%. We suppose that the forward LIBOR rates for the 3- to 9-month and the 9- to 15-month periods are 3.4% and 3.7%, respectively, with continuous compounding. The 3-to 9- month forward rate becomes 2 (exp(0.034 0.5)-1), or 3.429 % with semiannual compounding. Similarly, the 9- to 15-month forward rate becomes 3.734% with semiannual compounding. The LIBOR rate applicable to the exchange in 0.25 years was determined 0.25 years ago. Suppose it is 2.9% with semiannual compounding. What is the value of the swap to the financial institution? Express your answer as a proportion of $1 million, e.g. write "0.5" for $500,000. Answer 2 Marks 1 Mark Unsure 19 of 28 Unsure Answer Suppose that some time ago a financial institution entered into a swap, where it agreed to make semiannual payments at a rate of 3% per annum and receive LIBOR on a notional principal of $100 million. The swap now has a remaining life of 1.25 years. Payments will therefore be made 0.25, 0.75, and 1.25 years from today. The risk-free rates with continuous compounding for maturities of 3 months, 9 months, and 15 months are 5.2%, 5.7%, and 6%. We suppose that the forward LIBOR rates for the 3- to 9-month and the 9- to 15-month periods are 3.4% and 3.7%, respectively, with continuous compounding. The 3-to 9- month forward rate becomes 2 (exp(0.034 0.5)-1), or 3.429 % with semiannual compounding. Similarly, the 9- to 15-month forward rate becomes 3.734% with semiannual compounding. The LIBOR rate applicable to the exchange in 0.25 years was determined 0.25 years ago. Suppose it is 2.9% with semiannual compounding. What is the value of the swap to the financial institution? Express your answer as a proportion of $1 million, e.g. write "0.5" for $500,000. Answer 2 Marks 1 Mark
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