Question
lets assume that a company entered into a swap and agreed to make semi-annual payments at a rate of 4.7% per annum and receive LIBOR
lets assume that a company entered into a swap and agreed to make semi-annual payments at a rate of 4.7% per annum and receive LIBOR on a notional principal of $500 million. The swap now has a remaining life of 1.15 years. Payments will therefore 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 3.8%, 2.2%, and 4.4%, respectively. 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 2.4% and 2.7%, respectively, with semiannual compounding. The LIBOR rate applicable to the exchange in 0.15 years was determined 0.35 years ago. Suppose it is 1.9% with semiannual compounding.
a) What is the floating cash flow at time 1.15 (in $ millions)?
b) What is the value of the swap (in $ millions)?
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