Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Chapter 7: 1. Given the following yield curve: Maturity (years) LIBOR zero rate per annum (continuously compounded) 8% 9% 4 10% 11% a) If you

image text in transcribed
Chapter 7: 1. Given the following yield curve: Maturity (years) LIBOR zero rate per annum (continuously compounded) 8% 9% 4 10% 11% a) If you are asked to quote a 5-year at-the-market interest rate swap (IRS) with a notional principal of s10 million, what should be the mid fixed swap rate of the IRS (ignoring bid/ask spread) so that the swap has zero value in the beginning? The floating rate is LIBOR and interest exchange is made once a year. b) One year later, the original 5-year interest rate swap as in Part a) has a maturity of four years left. Assuming the above zero rates remain unchanged, what is the value of the $10 million IRS (with four remaining payments to exchange) from the fixed rate payer's point of view? The fixed rate is equal to the rate you have calculated in Part a) 2. For all maturities the HK dollar (HKD) interest rate is 2% per annum and the Singapore dollar (SGD) rate is 3% per annum. The current value of the SGD is 5.8 HKD. In a swap agreement, a financial institution pays 3% per annum in SGD and receives 3% per annum in HKD. The principals in the two currencies are 10 million SGD and 55 million HKD. Payments are exchanged every year, with one exchange having just taken place. The swap will last 3 more years. What is the value of the swap to the financial institution? continuously Assume all interest rates are compounded. Chapter 7: 1. Given the following yield curve: Maturity (years) LIBOR zero rate per annum (continuously compounded) 8% 9% 4 10% 11% a) If you are asked to quote a 5-year at-the-market interest rate swap (IRS) with a notional principal of s10 million, what should be the mid fixed swap rate of the IRS (ignoring bid/ask spread) so that the swap has zero value in the beginning? The floating rate is LIBOR and interest exchange is made once a year. b) One year later, the original 5-year interest rate swap as in Part a) has a maturity of four years left. Assuming the above zero rates remain unchanged, what is the value of the $10 million IRS (with four remaining payments to exchange) from the fixed rate payer's point of view? The fixed rate is equal to the rate you have calculated in Part a) 2. For all maturities the HK dollar (HKD) interest rate is 2% per annum and the Singapore dollar (SGD) rate is 3% per annum. The current value of the SGD is 5.8 HKD. In a swap agreement, a financial institution pays 3% per annum in SGD and receives 3% per annum in HKD. The principals in the two currencies are 10 million SGD and 55 million HKD. Payments are exchanged every year, with one exchange having just taken place. The swap will last 3 more years. What is the value of the swap to the financial institution? continuously Assume all interest rates are compounded

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Economics And Personal Finance

Authors: Irvin Tucker, Joan Ryan

1st Edition

1133562108, 978-1133562108

More Books

Students also viewed these Finance questions