What is the value of a European swap option that gives the holder the right to enter into a 3-year annual-pay swap in 4 years where a fixed rate of 5% is paid and LIBOR is received? The swap principal is $10 million. Assume that the yield curve is flat at 5% per annum with annual compounding and the volatility of the swap rate is 20%. Compare your answer with that given by DerivaGem.

 P-987