5. Swaps (10 points) Your firm has negotiated a HK $200,000,000 loan from a bank, where you will borrow this sum in return for agreeing to pay interest every six months for the next five years. Each interest payment will be made at the 6-month HIBOR rate plus 2%. For this problem, suppose all interest rates are expressed per annum with semiannual compounding. Your boss is uncomfortable with the risk that HIBOR will shoot up in the future, and wants you to use an interest rate swap to remove this risk. Suppose that at this time, the swap rate on a 5-year 6-month HIBOR swap with semiannual payments is 1.5%. (a) (5 points) What is the swap position you want to take to achieve fixed interest payments? That is, tell me the direction and the size of the swap you would want to enter. (b) (5 points) After engaging in the swap of (a), what is the effective interest rate on your loan? Tell me the percentage, and how you are expressing it (per annum with what compounding frequency). 5. Swaps (10 points) Your firm has negotiated a HK $200,000,000 loan from a bank, where you will borrow this sum in return for agreeing to pay interest every six months for the next five years. Each interest payment will be made at the 6-month HIBOR rate plus 2%. For this problem, suppose all interest rates are expressed per annum with semiannual compounding. Your boss is uncomfortable with the risk that HIBOR will shoot up in the future, and wants you to use an interest rate swap to remove this risk. Suppose that at this time, the swap rate on a 5-year 6-month HIBOR swap with semiannual payments is 1.5%. (a) (5 points) What is the swap position you want to take to achieve fixed interest payments? That is, tell me the direction and the size of the swap you would want to enter. (b) (5 points) After engaging in the swap of (a), what is the effective interest rate on your loan? Tell me the percentage, and how you are expressing it (per annum with what compounding frequency)