Interest Rate Swap - Mock Test - II, Q#: 94

anirban.dutta
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Interest Rate Swap - Mock Test - II, Q#: 94

Postby anirban.dutta » Mon May 12, 2014 8:15 am

A bank had entered into a 3-year interest rate swap for a notional amount of USD 300 million, paying a fixed rate of 7.5% per year and receiving LIBOR annually. Just after the payment was made at the end of the first year, the continuously compounded 1-year and 2-year annualized LIBOR rates were 7% per year and 8% per year, respectively. The value of the swap at that time was closest to which of the following choices?

Options:
A. USD -14 million
B. USD -4 million
C. USD 4 million
D. USD 14 million

edupristine
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Interest Rate Swap - Mock Test - II, Q#: 94

Postby edupristine » Tue May 13, 2014 1:12 pm

Fixed rate coupon = USD 300 million x 7.5% = USD 22.5 million Value of the fixed payment = Bfix = 22.5 e(-0.07)+322.5 e(-0.08*2) = USD 295.80 million
Value of the floating payment = Bfloating = USD 300 million. Since the payment has just been made the value of the floating rate is equal to the notional amount.
Value of the swap = Bfloating - Bfix = USD 300 - USD 295.80 = USD 4.2 million


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