7.31. A financial institution has entered into a swap where it agreed to receive quarterly payments at a rate of 2% per annum and pay the SOFR three-month reference rate on a notional principal of $100 million. The swap now has a remaining life of 10 months. Assume the risk-free rates with continuous compounding (calculated from SOFR) for 1 month, 4 months, 7 months, and 10 months are 1.4%, 1.6%, 1.7%, and 1.8%, respectively. Assume also that the continuously compounded risk-free rate observed for the last two months is 1.1%. Estimate the value of the swap.
7.31. A financial institution has entered into a swap where it agreed to receive quarterly payments at a rate of 2% per annum and pay the SOFR three-month reference rate on a notional principal of $100 million. The swap now has a remaining life of 10 months. Assume the risk-free rates with continuous compounding (calculated from SOFR) for 1 month, 4 months, 7 months, and 10 months are 1.4%, 1.6%, 1.7%, and 1.8%, respectively. Assume also that the continuously compounded risk-free rate observed for the last two months is 1.1%. Estimate the value of the swap.
Advanced Engineering Mathematics
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ISBN:9780470458365
Author:Erwin Kreyszig
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Transcribed Image Text:7.31. A financial institution has entered into a swap where it agreed to receive quarterly payments at a rate of 2%
per annum and pay the SOFR three-month reference rate on a notional principal of $100 million. The swap now
has a remaining life of 10 months. Assume the risk-free rates with continuous compounding (calculated from
SOFR) for 1 month, 4 months, 7 months, and 10 months are 1.4%, 1.6%, 1.7%, and 1.8%, respectively. Assume
also that the continuously compounded risk-free rate observed for the last two months is 1.1%. Estimate the
value of the swap.
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