Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Question
Chapter 26, Problem 21PS
a.
Summary Introduction
To compute: The value of swap at the time of entering and whether it is reasonably priced.
b.
Summary Introduction
To discuss: The person who will get gain and who will get a loss from the contract.
c.
Summary Introduction
To compute: The value of swap for each 1000 of notional value.
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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
In June 2021, swap dealers were quoting a rate for five-year sterling interest-rate swaps of 5.00% against Euribor (the short-term
interest rate for euro loans). Euribor at the time was 4.60%. Suppose that A arranges with a dealer to swap a £10 million five-year fixed-
rate loan for an equivalent floating-rate loan, answer the following:
Note: Leave no cells blank - be certain to enter "0" wherever required.
a. Assume the swap is fairly priced. What is the value of this swap at the time that it is entered into?
b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 1.6%. Who gains and who loses?
c. What is now the value of the swap to A for each £1,000 of par value?
Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to
2 decimal places.
a. Swap value
b. Who gains and who loses?
c. Swap value
An investor enters into a 2-year swap agreement to swap euros at $1.32 per euro. Soon after the swap is created forward prices rise and the new swap price on a similar swap is $1.45. If dollar denominated interest rates are 4.0% and 4.5% on 1- and 2-year zero coupon government bonds, respectively, what is the gain to be made from unwrapping the original swap agreement?
Chapter 26 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Prob. 3PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Prob. 7PSCh. 26 - Prob. 8PSCh. 26 - Prob. 9PSCh. 26 - Prob. 10PS
Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 12PSCh. 26 - Prob. 13PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Prob. 18PSCh. 26 - Prob. 20PSCh. 26 - Prob. 21PSCh. 26 - Prob. 22PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 25PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Risk management Petrochemical Parfum (PP) is...Ch. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - You are a vice president of Rensselaer Advisers...
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