Question 2. Suppose euro swap rates are as given in the previous question. A hedge fund (HF) executes the following two trades with a dealer: 1 (1) The HF pays fixed and receives floating on 100 million notional of a one-year swap at the forward swap rate. (2) The HF receives fixed and pays floating on 100 million notional of a three-year swap at the forward swap rate. Assume bid-offer costs are negligible. a) After one year, what net cashflow has the dealer paid to (or received from) the HF? b) Suppose after one year, one-year and two-year euro swap rates are unchanged. What is the current value of the remaining part of the HF trade? c) Suppose after one year, the one-year euro swap rate is unchanged but the two-year euro swap rate is now Y%. What value of Y gives a total zero profit on the trade (at T = 1)? d) Do you like the trades the HF executed? Discuss briefly the risks of the trade, in particular commenting on which interest rates the HF is exposed to. Question 2. Suppose euro swap rates are as given in the previous question. A hedge fund (HF) executes the following two trades with a dealer: 1 (1) The HF pays fixed and receives floating on 100 million notional of a one-year swap at the forward swap rate. (2) The HF receives fixed and pays floating on 100 million notional of a three-year swap at the forward swap rate. Assume bid-offer costs are negligible. a) After one year, what net cashflow has the dealer paid to (or received from) the HF? b) Suppose after one year, one-year and two-year euro swap rates are unchanged. What is the current value of the remaining part of the HF trade? c) Suppose after one year, the one-year euro swap rate is unchanged but the two-year euro swap rate is now Y%. What value of Y gives a total zero profit on the trade (at T = 1)? d) Do you like the trades the HF executed? Discuss briefly the risks of the trade, in particular commenting on which interest rates the HF is exposed to