A (the Payer) enters into a fixed for floating swap arrangement with B (the Receiver). USD 360-day LIBOR at the date the swap is created: 3.72% USD 360 - day LIBOR after 1 year: 3.81% The terms of the agreement are as follows: Fixed rate 4.22% Tenor, years 2.0 Notional principal 4,000,000.0 Frequency Annual Floating rate USD 360- day LIBOR What is the net cash flow for B ( the Receiver) in year 1 ? Select one: 20,000.0 16,400.0 (16,400.0) (20,000.0)

A (the Payer) enters into a fixed for floating swap arrangement with B (the Receiver). USD 360-day LIBOR at the date the swap is created: 3.72% USD 360 - day LIBOR after 1 year: 3.81% The terms of the agreement are as follows: Fixed rate 4.22% Tenor, years 2.0 Notional principal 4,000,000.0 Frequency Annual Floating rate USD 360- day LIBOR What is the net cash flow for B ( the Receiver) in year 1 ? Select one: 20,000.0 16,400.0 (16,400.0) (20,000.0)

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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2 Companies A and B face the following interest rates: Company A 3% Company B x% UK pounds (fixed rate) US dollars (floating rate) LIBOR-0.25% LIBOR-0.5% (i) Assuming that A wants to borrow in British pounds at a fixed rate and B wants to borrow in US dollars at a floating rate, derive a lower or upper bound for x that allows these companies to enter into a profitable swap agreement. (ii) Assume now that x = 2.5%, design a swap that is equally at- tractive to both companies arranged by a financial intermediary that makes a profit of 0.05% from these operations. (iii) Assume now that x = 2.8%, describe the conditions under which a swap contract between A and B makes sense. Design a swap that is equally attractive to both companies without a financial intermediary.
1. (7 marks) A stock XYZ is quoted 1015. Two counterparties agree to enter into a forward contract maturing at T = 6 months. Here are the possible values of XYZ, at maturity. XYZ at T=6 months XYZ Forward Long Short 1000 1015 1020 1030 1080 (A) Find the possible values of the payoff for the buyer and for the seller of the forward and sketch a graph of the payoffs. (3.5 marks) (B) We know that spot price at expiration can be duplicated according to Forward + Zero Coupon bond = Spot Price at Maturity. Find the possible values of the zero coupon bond. What can you say about the risk associated with this bond? (3.5 marks)
Consider the following countinuous compunding LIBOR spot rates: 3M (2,2% pa.), 6M (2,3% pa.), 9M (2,6% pa.), 12M (3% pa.). Find a simple compunding rate pa. (interest compounded each 4M) which is equivalent to forward rate pa (under countinuous compunding for period starting from the end of 6M till the end of 9M).
2) XYZ has cash of FC 100,000 on both April 30 and May 31, 2010. The applicable spot rates for April 30 and May 31 are as follows: April 30: 1US = 5FC May 31: 1 US= 4FC How much is the FX transaction gain or loss on May 31, 2010.
A 2-year swap based on LIBOR is entered into on 30/6/2010 with current spot 3 month LIBOR at 0.54%. The swap is based on a notional principal of $100m What is the swap rate?
2 Assume Carlton enters into a three-year fixed-for-fixed swap agreement to receive Swiss Franc and pay U.S. dollar annually, on a notional amount of $6,000,000. The spot exchange rate at the time of the swap is SFO.8/$. Assume that one year into the swap agreement Carlton decides it wishes to unwind the swap agreement and settle it in dollars. Assuming that a two- year fixed rate of interest on the Swiss Franc is now 2.59%, and a two-year fixed rate of interest on the dollar is now 5.90%, and the spot rate of exchange is now SFO.0.810/$. To Carlton, what is the net present value (in dollar) of the swap agreement? (Keep the sign and two decimal places.) 3 Euro-€ Years Bid Ask Bid Ask Swiss franc 3.08 3.12 1.68 1.76 3.25 3.29 2.12 2.17 U.S. dollar Bid Ask 5.43 5.46 Japanese yen Bid 0.45 5.54 5.59 0.56 Ask 0.49 0.59

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