Version 2 QA BANK321 Quantitative Question (ILO:A1/B1) (18%) Suppose in an interest rate swap the notional principal is $10,000,000 with a swap period of 2 years. Two companies agree to exchange a fixed for a floating income stream. Barmko agreesto pay 3.5% to Darmko. Darmko agrees to pay Barmko LIBOR+ 2% 1a. Suppose at the end of the first year LIBOR is 2%, which party and how much will that party net? (SHOW CALCULATIONS HERE. USE NO TEXT) Barmko pays Darmko: (1 %) Darmko pays Barmko: (1%) Barmko nets from Darmko: (1) 1b. Suppose that the end of the second year LIBOR is 4%, which party and how much will that party net? (SHOW CALCULATIONS HERE. USE NO TEXT) Barmko pays Darmko: (1%) Darmko pays Barmko: (17) Barmko nets from Darmko: (1) Over the two years Barmko nets from Darmko: (1) 2. As a hedge, Darmko buys a two-year cap on a 6 month LIBOR of $10,000,000 with current LIBOR at 4%, suppose that in the . first six months LIBOR rises to 7% second six months LIBOR rises to 8% third six months LIBOR rises to 9% fourth six months LIBOR rises to 11% . . What will be the overall cash position of Darmko, as a holder of both the interest rate swap above and the cap at 2%, at the end of two years? (Assume the cost of the cap is $500,000) (SHOW CALCULATIONS HERE. USE NO TEXT) 1st six months: (1%) 2nd six months: (1%) 3rd six months: (1 %) 4th six months: (1) Sum (over two year period) (1) After hedge of the i-rate swap with the cap, the net position of Darmko = (2) 2