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At inception, the swap rate sp = 4%pa (simple rate) on a plain vanilla receive-fixed, pay-float interest rate swap with principal, Q= $100m. The previous

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At inception, the swap rate sp = 4%pa (simple rate) on a plain vanilla receive-fixed, pay-float interest rate swap with principal, Q= $100m. The previous reset date was 15th January when the 6-month LIBOR rate was 3.6% pa (simple interest). The tenor in the swap is 6-months, so that 15th January and 15th July are reset dates. It is now 15th March. The maturity date of the swap is next 15th January. The yield curve is a). Calculate the mark-to-market value of the swap on 15th March. Qualitatively explain what might happen to the value of the swap if the yield curve shifts upwards over the next day. b). You hold a $10m, 2-year bank deposit which pays 90-day LIBOR. Explain how you could reduce interest rate risk by using either an interest rate swap or an interest rate floor. Using the payoffs (at any reset date), explain the difference in outcomes between these two strategies. At inception, the swap rate sp = 4%pa (simple rate) on a plain vanilla receive-fixed, pay-float interest rate swap with principal, Q= $100m. The previous reset date was 15th January when the 6-month LIBOR rate was 3.6% pa (simple interest). The tenor in the swap is 6-months, so that 15th January and 15th July are reset dates. It is now 15th March. The maturity date of the swap is next 15th January. The yield curve is a). Calculate the mark-to-market value of the swap on 15th March. Qualitatively explain what might happen to the value of the swap if the yield curve shifts upwards over the next day. b). You hold a $10m, 2-year bank deposit which pays 90-day LIBOR. Explain how you could reduce interest rate risk by using either an interest rate swap or an interest rate floor. Using the payoffs (at any reset date), explain the difference in outcomes between these two strategies

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