In September 2020, swap dealers were quoting a rate for five-year euro interest-rate swaps of 5.4% against Euribor (the short-term interest rate for euro loans). Euribor at the time was 5.0%. Suppose that A arranges with a dealer to swap a C10 million five-year fixed-rate loan for an equivalent floating-rate loan in euros, answer the following: (Leave no cells blank - be certain to enter "O" wherever required,.) a. Assume the swap is fairly priced. What is the value of this swap at the time that it is entered into? Swap value b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 2.0%. Who gains and who loses? Dealer gains; A loses A gains; Dealer loses

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
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In September 2020, swap dealers were quoting a rate for five-year euro interest-rate swaps of 5.4% against Euribor
(the short-term interest rate for euro loans). Euribor at the time was 5.0%. Suppose that A arranges with a dealer to
swap a €10 million five-year fixed-rate loan for an equivalent floating-rate loan in euros, answer the following: (Leave
no cells blank - be certain to enter "O0" wherever required.)
a. Assume the swap is fairly priced. What is the value of this swap at the time that it is entered into?
Swap value
b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 2.0%. Who gains
and who loses?
Dealer gains; A loses
A gains; Dealer loses
c. What is now the value of the swap to A for each €1,000 of par value? (A negative answer should be indicated by
a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.)
Swap value
Transcribed Image Text:In September 2020, swap dealers were quoting a rate for five-year euro interest-rate swaps of 5.4% against Euribor (the short-term interest rate for euro loans). Euribor at the time was 5.0%. Suppose that A arranges with a dealer to swap a €10 million five-year fixed-rate loan for an equivalent floating-rate loan in euros, answer the following: (Leave no cells blank - be certain to enter "O0" wherever required.) a. Assume the swap is fairly priced. What is the value of this swap at the time that it is entered into? Swap value b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 2.0%. Who gains and who loses? Dealer gains; A loses A gains; Dealer loses c. What is now the value of the swap to A for each €1,000 of par value? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Swap value
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