1.SWAPS

1(a) Apple Inc. and Boeing Corp. have been offered the following rates per annum on a $10 million 5-year investment:

Fixed Rate Floating Rate

Apple Inc. 3.5% LIBOR

Boeing Corp. 4.3% LIBOR

Apple Inc. requires a fixed-rate investment; Boeing Corp. requires a floating-rate investment. Design a swap that will net Chase Bank, acting as intermediary, 0.2% per annum and will appear equally attractive to Apple and Boeing. In your answer, provide details of each swap contract for Apple and Boeing and a detailed diagram showing the swap-related cash flow rates between Apple, Boeing and Chase Bank, their financial intermediary.

1(b) At the end of Year 4 of the 5-year swap described in part (a) above, Apple Inc. receives an annual fixed rate of 3.8% and pays LIBOR. The swap contract stipulates semiannual payments, i.e. every 6 months.

Time LIBOR Risk-free rates with continuous compounding

6 months 3.5% 3.0%

12 months 4.0% 3.8%

Compute the value of the swap to Apple Inc. at the end of Year 4 of the swap contract.