Question
The interest rate for the fixed side of a 4-year CAD interest rate swap is 2.1% (against CAD LIBOR). Parties A and B agree to
The interest rate for the fixed side of a 4-year CAD interest rate swap is 2.1% (against CAD LIBOR). Parties A and B agree to a CAD 100M swap where Party A agrees to pay Party B a rate of 2.1% on CAD 100M at the end of each of the next 4 years and in return B will pay A the floating CAD interest rate (CAD LIBOR) on CAD 100M at the end of each of the next 4 years. a. What is the NPV of this swap at its origination? What is the PV of the floating rate payments? b. Suppose that immediately after the second years interest payments, the CAD fixed interest rate for a newly originated 2-year CAD swap is now 2.5%. Does the remainder of the original swap have a positive or negative value to Party A? Explain. c. Determine the value of the original swap to Party A immediately after the second years interest payments.
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