Q.6 Swaps (10pts)

a) Define and explain what a Swap is using the bond portfolio method for the case of a financial institution that pays the variable rate (LIBOR 6 months) and receives the annual fixed rate (compo. semes.)

b) Assume the following data:

- main: 152M;

- ZC LIBOR (cont.), payment received: 3 months = 10.12%, 9 months = 10.34% and 15 months = 10.73%;

- annual fixed rate is 8.03% (half-yearly composition);

- 6-month LIBOR rate paid by the financial institution (single payment): 10.04%

- the maturity of the Swap is 1.25 years.

Calculate the value of the swap using the formula from a).