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A bank has hedged its fixed-rate mortgage book with an interest rate swap, where it pays fixed at 5% and receives LIBOR semi-annually on a
A bank has hedged its fixed-rate mortgage book with an interest rate swap, where it pays fixed at 5% and receives LIBOR semi-annually on a $100 million notional. There is 1.75 years left on the swap, and the last LIBOR rate set 3 months ago at 4.5\% (semi-annual compounding). LIBOR rates for 3-months, 9months,15-months and 21- months are 4.55%,4.60%,4.70% and 4.85% (cont. compounding). The forward rates for 3-months to 9-months is 4.65%, 9-months to 15 -months is 4.8% and 15 -months to 21-months is 4.95% (cont. compounding). Calculate the value of the swap to the bank using FRAs and LIBOR discounting
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