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Options, Futures, and Other Derivatives | 9th Edition | ISBN: 9780133456318 | Authors: John C. Hull
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A $100 million interest rate swap has a remaining life of 10 months. Under the terms of

Chapter 7, Problem 7.3

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QUESTION:

A $100 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, 6-month LIBOR is exchanged for 7% per annum (compounded semiannually). The average of the bidoffer rate being exchanged for 6-month LIBOR in swaps of all maturities is currently 5% per annum with continuous compounding. The 6-month LIBOR rate was 4.6% per annum 2 months ago. What is the current value of the swap to the party paying floating? What is its value to the party paying fixed?

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QUESTION:

A $100 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, 6-month LIBOR is exchanged for 7% per annum (compounded semiannually). The average of the bidoffer rate being exchanged for 6-month LIBOR in swaps of all maturities is currently 5% per annum with continuous compounding. The 6-month LIBOR rate was 4.6% per annum 2 months ago. What is the current value of the swap to the party paying floating? What is its value to the party paying fixed?

ANSWER:

Problem 7.3

A $100 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, 6-month LIBOR is exchanged for 7% per annum (compounded semi-annually). The average of the bid offer rate being exchanged for 6-month LIBOR in swaps of all maturities is currently 5% per annum with continuous compounding. The 6-month LIBOR rate was 4.6% per annum 2 months ago. What is the current value of the swap to the party paying floating? What is its value to the party paying fixed?

                                                              Step by Step Solution

Step 1 of 6

Loan in which the rate of interest which is required to be paid by the borrower remains fixed is known as fixed interest rate loan. Borrowers have to pay fixed obligations in such types of loans.

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