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Payout on a swaption: During the height of COVID crisis, the 10-yr Treasury bond was yielding 0.70% and the 10-yr swap rate was at 0.90%. Despite all the inflation warnings, you took the view that the 10-yr swap rate cannot possibly go above 1.50% and, therefore, you sold a 12-month swaption on a 10-yr 1.50% Payer Swap on a notional of $100mln. Today, the swaption expires, and it turns out you were wrong. The 10-yr swap rate is quoted at 1.78%. Roughly what cash settlement will you have to make to the buyer of the swaption?

Payout on a swaption: During the height of COVID crisis, the 10-yr Treasury bond was yielding 0.70% and the 10-yr swap rate was at 0.90%. Despite all the inflation warnings, you took the view that the 10-yr swap rate cannot possibly go above 1.50% and, therefore, you sold a 12-month swaption on a 10-yr 1.50% Payer Swap on a notional of $100mln. Today, the swaption expires, and it turns out you were wrong. The 10-yr swap rate is quoted at 1.78%. Roughly what cash settlement will you have to make to the buyer of the swaption?

Applications and Investigations in Earth Science (9th Edition)
Applications and Investigations in Earth Science (9th Edition)
9th Edition
ISBN:9780134746241
Author:Edward J. Tarbuck, Frederick K. Lutgens, Dennis G. Tasa
Publisher:Edward J. Tarbuck, Frederick K. Lutgens, Dennis G. Tasa
Chapter1: The Study Of Minerals
Section: Chapter Questions
Problem 1LR
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Payout on a swaption: During the height of COVID crisis, the 10-yr Treasury bond was yielding 0.70% and the 10-yr swap rate was at 0.90%. Despite all the inflation warnings, you took the view that the 10-yr swap rate cannot possibly go above 1.50% and, therefore, you sold a 12-month swaption on a 10-yr 1.50% Payer Swap on a notional of $100mln. Today, the swaption expires, and it turns out you were wrong. The 10-yr swap rate is quoted at 1.78%. Roughly what cash settlement will you have to make to the buyer of the swaption? $2.54mln $1.33mln $8.00mln O $4.13mln $6.34mln
Transcribed Image Text:Payout on a swaption: During the height of COVID crisis, the 10-yr Treasury bond was yielding 0.70% and the 10-yr swap rate was at 0.90%. Despite all the inflation warnings, you took the view that the 10-yr swap rate cannot possibly go above 1.50% and, therefore, you sold a 12-month swaption on a 10-yr 1.50% Payer Swap on a notional of $100mln. Today, the swaption expires, and it turns out you were wrong. The 10-yr swap rate is quoted at 1.78%. Roughly what cash settlement will you have to make to the buyer of the swaption? $2.54mln $1.33mln $8.00mln O $4.13mln $6.34mln
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