Question
A financial institution has agreed to pay 6% per annum quarterly compounded and to receive floating rate in return in an interest rate swap. The
A financial institution has agreed to pay 6% per annum quarterly compounded and to receive floating rate in return in an interest rate swap. The floating rate is calculated using the average SOFR over the period. The notional principal is $50 million and payments are exchanged every three months. The swap has a remaining life of 10 months. The term structure of the forward-looking SOFR is flat at 5.4% per annum with continuous compounding. The average continuously compounded SOFR rate in the last one month was 5.1% per annum. Use SOFR as the discount rate for discounting. What is the value of the swan?
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