A $50 million interest rate swap has a remaining life of 16 months. Under the terms of the swap, 6-month LIBOR is exchanged for a fixed rate of 7% per annum (compounded semiannually). The average of the bid-offer rate being exchanged for 6-month LIBOR in swaps of all maturities is currently 5% per annum with continuous compounding. The 6-month LIBOR rate was 4.6% per annum 2 months ago. Answer the following questions. Each question worthies 4 points.

a) Use bond approach to find the current value of the swap to the party paying floating.

b) Use bond approach to find the current value to the party paying fixed

c) Use FRA approach to find the current value of the swap to the party paying floating.

d) Use FRA approach to find the current value to the party paying fixed

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