1. On April 15, KS Inc. Takes out a one year floating rate loan for $10 million. Interest payments are quarterly at LIBOR plus 200 basis points based on actual days in the period over 360. The payments are due July 15, January 15, and April 15. KS purchases a nine-month quarterly pay cap for $15,000 with a strike rate of 8.5%. The first caplet expires July 15. Assuming LIBOR rates on April 15,july 15,October 15,and January 15 are 8.0%,8.4%,8.65%,and 8.4% respectively, determine the four payoff dates on the loan, the loan interest paid, any option payment received, and the effective net interest paid. Day counts: April 15 to July 15: 91 days July 15 to October 15: 92 days October 15 to January 15: 92 days January 15 to April 15: 90 days

2. Company X has a $ 100 million, 2 year, % fixed rate semi-annual pay debt. Payments are actual count over a 360-day year. The company expects interest rates to fall and would prefer to have a floating rate debt. Company Y has a $100 million, two year, floating rate semi-annual pay debt at LIBOR plus 100 basis points. Payments are actual day count over a 360-day year. The company expects interest rates to rise and would like to use a swap to convert the debt to fixed rate. A $100 million, two year 5.5% semi-annual pay swap versus LIBOR plus 125 basis points is available to both X and Y. Demonstrate how each the two can use this swap to achieve its objectives.

3. A U.S. company has a liability of 10 million in fixed rate bonds outstanding at 6%. A Germany company has a $15 million FRN outstanding at LIBOR. The exchange rate is $1.5/. The US Company enters into a plain vanilla currency swap with the swap dealer in which it pays LIBOR on $15 million and receives the swap rate of 6.0% on 10 million. The Germany also enters into a plain vanilla currency swap with the same dealer, in which it pays a swap rate of 6.1% on 10 million and receives LIBOR on $15 million. One year LIBOR is currently 5.2%. Calculate each partys net borrowing cost, the principal cash flows at the initiation and maturity of the contract, and the first year cash flows (assume annual settlement).

4. Investigate the phenomenon of the underwriting cycle in the insurance industry and discuss the following: a) Its relevance to the industry b) Appropriate strategies for dealing with it