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

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

Table 2

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?