Question
Assume that a while ago, a financial institution entered into a swap where it agreed to make semiannual payments at a rate of 3.5% per
Assume that a while ago, a financial institution entered into a swap where it agreed to make semiannual payments at a rate of 3.5% per annum and receive LIBOR on a notional principal of $300 million. Remaining life of the swap is now 1.15 years. Payments will be made 0.15, 0.65, and 1.15 years from today. The risk-free rates with continuous compounding for maturities of 0.15, 0.65, and 1.15 years are 2.8%, 3.2%, and 3.4%. We suppose that the forward LIBOR rates for the 0.15 to 0.65 year and the 0.65 to 1.15 year periods are 3.4% and 3.7% with semiannual compounding. The LIBOR rate applicable to the exchange in 0.15 years was determined 0.35 years ago. Assume it is 2.9% with semiannual compounding.
What is the value of the swap (In $ millions)?
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