Question: Suppose that all 12-month LIBOR forward rates are 5% with annual compounding. The OIS zero curve is flat at 4.8% with continuous compounding. In a

Suppose that all 12-month LIBOR forward rates are 5% with annual compounding. The OIS zero curve is flat at 4.8% with continuous compounding. In a five-year swap, company X pays a fixed rate of 6% and receives LIBOR. The volatility of the two-year swap rate in three years is 20%.

(a) What is the value of the swap?

(b) Use DerivaGem to calculate the value of the swap if company X has the option to cancel after three years.

(d) What is the value of the swap if either side can cancel at the end of three years?

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a A swap where 5 is exchanged for LIBOR is worth zero When 6 is paid the value of the swap is 1e 004... View full answer

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