Question 45:

Consider an outstanding swap for a counterparty that pays six-month LIBOR and receives 2.5% on the fixed leg of the swap. Terms of the swap and other information are as follows: o Notional principal is $500,000 o Remaining payment dates are in 2, 8, and 14 months o The 6-month LIBOR rate on the last payment date (4 months ago) was 2.4%. o The 2-month LIBOR is currently 2.85%. The forward LIBOR rates are 3.15% and 3.55% for the period between 2 and 8 months and 8 and 14 months, respectively. o LIBOR, forward LIBOR and swap rate are all compounded semi-annually. o OIS zero rates are currently 2.8%, 3.3%, and 3.75% for 2-month, 8-month and 14-month terms, respectively. All OIS rates are compounded continuously.

a) If LIBOR rates are used as risk-free rates, what is the value of swap?

b) If OIS rates are used as risk-free rates, what is the value of swap?