Q3

A bank entered into an interest rate swap to receive six-month BBSW and pay 4,5% per annum (semi-annually compounded) on a principal of $25 million for two years. Payments are made every six months. At the end of 4 months, the bank wants to value this swap. Assuming the discounting interest rates frontinuously compounded) are 2% per annum for all maturities. The 6-month BBSW rate was 4% per annum (semi- annually compounded) when the swap was entered. a) When the bank entered the swap contract, what was the value of this swap to the bank? (1 mark) b) At the end of 4 months, what is the value of this swap to the bank? (4 marks)