3. You are a swap dealer and you have the following deals on your book:

Long 2-year receiver vanilla interest-rate swap, at 6.75% p.a. 30/360. USD N 5 50 million.

3-year receiver vanilla interest-rate swap, at 7.00% p.a. 30/360. USD N 5 10 million.

Short 5-year receiver vanilla interest-rate swap, at 7.55% p.a. 30/360. USD N 5 10 million.

a. Show the cash flows of each swap.

b. What is your net position in terms of cash flows? Show this on a graph.

c. Calculate the present values of each swap using the swap curve:

Maturity Bid
Ask 2 6.75
6.80 3 6.88
6.92 4 7.02
7.08 5 7.45
7.50 6 8.00
8.05

d. What is your net position in terms of present value?

e. How would you hedge this with a 4-year swap? Which position would you take, and what should the notional amount be?

f. Where would you go to get this hedge?

g. Can you suggest another hedge?