20. Interest rate swaps (S27-6) In June 2021, swap dealers were quoting a rate for five-year sterling interest-rate swaps of 0.73% against SONIA (the short-term interest rate for sterling loans). SONIA at the time was 0.05%. Suppose that A arranges with a dealer to swap a

£10 million five-year fixed-rate loan for an equivalent floating-rate loan.

a. Assume the swap is fairly priced. What is the value of this swap at the time that it is entered into?

b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 1%. Who gains and who loses?

c. What is now the value of the swap for each £1,000 of par value?