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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Question 1
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.
Transcribed Image Text:You observe the following market for zero-rates. Rates are continuously compounded.
Zero rate
0.20%
1.40%
2.50%
3.50%
4.40%
5.20%
5.90%
6.50%
7.00%
7.40%
7.70%
7.90%
Maturity (years)
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Table 1
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