12. An interest rate swap with a notional principal of 200m has a remaining life of 9 months. The terms of the swap require the 6-month LIBOR to be exchanged for 6.9% per annum with semi-annual compounding. The current swap rate being exchanged for LIBOR in swaps of all maturities is 6.1% per annum with continuous compounding. Three months ago the 6-month LIBOR was 5.7% per annum. a) Demonstrate, using a diagram, how the swap is constructed. (10 marks) b) Explain the principal which underpins swap valuation. (30 marks) c) Calculate the value of the swap to the party paying the floating rate. Assume that the swap takes place without involving a financial intermediary. (60 marks) 12. An interest rate swap with a notional principal of 200m has a remaining life of 9 months. The terms of the swap require the 6-month LIBOR to be exchanged for 6.9% per annum with semi-annual compounding. The current swap rate being exchanged for LIBOR in swaps of all maturities is 6.1% per annum with continuous compounding. Three months ago the 6-month LIBOR was 5.7% per annum. a) Demonstrate, using a diagram, how the swap is constructed. (10 marks) b) Explain the principal which underpins swap valuation. (30 marks) c) Calculate the value of the swap to the party paying the floating rate. Assume that the swap takes place without involving a financial intermediary. (60 marks)