Some time ago a swap dealer entered into a Forward Rate Agreement (FRA) that has a notional value of $25,000,000. The swap dealer agreed to pay 4.96% based on quarterly compounding and receive Libor. Libor zero rates (based on continuous compounding are given below. a. What is the value of the FRA to the swap dealer assuming it begins in 9 months and lasts for 3 months? b. Provide an example which shows exactly how the swap dealer can hedge its position in the FRA. Zero Rate (%) Maturity (months) 3 6 9 12 15 4 4.5 5 5.5 01

Some time ago a swap dealer entered into a Forward Rate Agreement (FRA) that has a notional value of $25,000,000. The swap dealer agreed to pay 4.96% based on quarterly compounding and receive Libor. Libor zero rates (based on continuous compounding are given below. a. What is the value of the FRA to the swap dealer assuming it begins in 9 months and lasts for 3 months? b. Provide an example which shows exactly how the swap dealer can hedge its position in the FRA. Zero Rate (%) Maturity (months) 3 6 9 12 15 4 4.5 5 5.5 01

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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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

Economics
Some time ago a swap dealer entered into a Forward Rate Agreement (FRA) that has a notional value
of $25,000,000. The swap dealer agreed to pay 4.96% based on quarterly compounding and receive
Libor. Libor zero rates (based on continuous compounding are given below.
a. What is the value of the FRA to the swap dealer assuming it begins in 9 months and lasts for 3
months?
b. Provide an example which shows exactly how the swap dealer can hedge its position in the FRA.
Zero Rate (%)
Maturity
(months)
3
4
6.
4.5
12
5.5
15
6

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You work at the interest rates swaps trading desk of an investment bank. Exactly three years ago you entered into an interest rate swap with a client with a notional of €200 million. The client is paying a fixed rate of 4% with semi-annual frequency and receiving the floating rate LIBOR with semi-annual frequency. The interest rate swap had a maturity of six years when it was initiated.Today is payment day and you have already exchanged the cash-flows for today. What is the value of this interest rate swap for you? Use the data in Table 1. Please show your calculations. Discuss your result. Rates are continuously compounded in image attachedb
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