12. An interest rate swap with notional value of 50m has a remaining life of 9 months. The terms of the swap require the 6-month LIBOR to be exchanged for 6% per annum with semi-annual compounding. The current swap rate being exchanged for LIBOR in swaps of all maturities is 5% per annum with continuous compounding. Three months ago the 6-month LIBOR was 5.5% per annum. (a) Explain, using a diagram, how the swap is constructed. (10 marks) (b) 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) (c) Explain the principal which underpins swap valuation. (30 marks) 12. An interest rate swap with notional value of 50m has a remaining life of 9 months. The terms of the swap require the 6-month LIBOR to be exchanged for 6% per annum with semi-annual compounding. The current swap rate being exchanged for LIBOR in swaps of all maturities is 5% per annum with continuous compounding. Three months ago the 6-month LIBOR was 5.5% per annum. (a) Explain, using a diagram, how the swap is constructed. (10 marks) (b) 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) (c) Explain the principal which underpins swap valuation. (30 marks)