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Problem 1 What is the value of the following swap? In an interest rate swap 1

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Problem 1

What is the value of the following swap? In an interest rate swap

1. a financial institution A has agreed to pay 6-month LIBOR

2. a financial institution B has agreed to pay 6-month US Treasury

3. the notional principal is $600 million with payments being exchanged every 6 months.

4. The swap has a remaining life of 16 months.

5. The LIBOR rates with continuous compounding for next months is in table 2

6. We are in Aug 1, 2000

7. The 6-month LIBOR rate the previous months are in table 1, expressed per year.

8. We will discount everything with LIBOR

Table 1

Date	6 month LIBOR	6 month US Treasury
Feb 1, 2000	2.86%	2.82%
March 1, 2000	2.88%	2.87%
Apr 1, 2000	2.91%	2.93%
May 1, 2000	2.89%	2.91%
June 1, 2000	2.93%	2.84%
July 1, 2000	3.01%	2.91%
Aug 1, 2000	3.02%	2.95%

 

Table 2

From Aug 1 , 2000	1- month LIBOR   1.03%
From Aug 1 , 2000	4- month LIBOR   1.03%
From Aug 1 , 2000	7- month LIBOR   1.03%
From Aug 1 , 2000	10- month LIBOR 1.03%
From Aug 1 , 2000	13- month LIBOR 1.03%
From Aug 1 , 2000	16- month LIBOR 1.03%

 

Problem 2:

We analyze a European put option with a two-step binomial tree.

Suppose that         the stock price starts at $115 in the next two steps that price may go up or down knowing that the volatility of the price of the stock is 20% for each step Each step is 5 months The risk-free interest rate is 3.79% per year

a/Find the value of a European put option with a strike price of $117. b/ What would be the value of the put option if it were American?