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A $100 million interest rate swap has a remaining life of 10 months
A $100 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, six-month LIBOR is exchanged for 4% per annum (compounded semiannually). Six-month LIBOR forward rates for all maturities are 3% (with semiannual compounding). The six-month LIBOR rate was 2.4% annum two months ago. OIS rates for all maturities are 2.7% with continuous compounding. What is the current value of the swap to the party paying floating? What is the value to the party paying fixed?
Expert Solution
Answer:
After 4 months,
Amount Received = 4%*100/2 = 2 million
Amount Paid = 2.4%*100/2 = 1.2 million
Value of first forward contract = (2-1.2)*Exp(-0.027*4/12) = 0.7928
After 10 months,
Value of second forward contract = (100*(0.04-0.03)/2)*Exp(-0.027*10/12) = 0.4889
Total Value of the forward contracts = 0.7928+0.4889 = 1.282 million
current value of the swap to the party paying floating = 1.282 million
the value to the party paying fixed= -1.282 million
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