During their very enjoyable lunch, well known tax consultant Darth Evader has suggested to Ms. van Plonk that she do him a swap whereby he will make a single payment up front, in return for a set of floating payments out to five years. The nominal or face value of the swap will be $1m.

(i) Using zeros for the valuation, what should Ms van Plonk be asking him to pay?

Assume pre-lunch interest rates and ignore commission and other transaction costs.

(ii) Would such a swap be more or less exposed to the post-lunch change in interest rates?