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What is the value of a European swap option that gives the holder the right to enter into a 3-year annual-pay swap in 4 years
What is the value of a European swap option that gives the holder the right to enter into a 3-year annual-pay swap in 4 years where a fixed rate of 5% is paid and floating is received? The swap principal is $10 million. Assume that the volatility of the swap rate is 20%, all swap rates are 5%, and all OIS rates are 4.7%.
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