A Bermudan cancelable swap allows the owner to cancel a swap at some point before the swap maturity. The cancellation option is economically equivalent to a Bermudan swaption into an offsetting swap. Using the same setup as Example 3, consider a 2-year swap with semiannual fixed rate of \(K\) per annum.

(a) Solve for \(K\) so that today's value of the swap is 0 , that is, the 2-year par swap rate.

(b) The fixed-rate payer in the above swap has the Bermudan option to cancel the swap in 6 months, 1 year, or 1.5 years. The cancellation option is economically equivalent to a 6 month into 2 -year Bermudan receiver swaption with strike \(K\). Solve for \(K\) that would make today's value of the cancelable swap 0 . Is \(K\) above or below the 2-year par swap rate?

(c) The fixed-rate receiver in the above swap has the option to cancel the swap in 6 months, 1 year, or 1.5 years. The cancellation option is economically equivalent to a 6 month into 2 -year Bermudan payer swaption with strike \(K\). Solve for \(K\) that would make today's value of the cancelable swap 0 . Is \(K\) above or below the 2 -year par swap rate?