Swap Markets and Contracts

Solution is available here for U$4.50

Task 5: Problem Set                     Swaps                                                 Name:                  

Directions: Type your answer to each question where indicated. Use more space if needed. At least 6 lines

1.   A swap dealer notes the following term structure of $LIBOR interest rates:

180 days                      5.55 percent

360 days                      5.75 percent

540 days                      5.95 percent

720 days                      6.10 percent

What would be the fixed rate and semi-annual fixed payments on a $10 million, two-year swap?

2.   Suppose the same swap dealer offers a U.S. firm a two-year currency swap of $10 million for ¥990 million when the term structure of $LIBOR interest rates is as in problem 1 and the term structure of ¥LIBOR interest rates is as follows:

180 days                      0.50 percent

360 days                      0.85 percent

540 days                      1.15 percent

720 days                      1.20 percent

What are the implied forward rates and market values of the implicit forward contracts in this swap?

3.   Suppose a $20 million notional principal plain vanilla swap has the fixed party paying 10 percent and the floating rate party paying 9.5 percent for the upcoming payment.  Payments are based on the assumption of 180 days in the payment period and 360 days in a year. What is the next net payment for the fixed payer?

4.   30 days earlier, a pension fund entered into a $60 million, six-month equity swap agreement to receive an equity return in exchange for fixed payments. Payments were set for 90 and 180 days with a fixed rate of 9.87 percent and the stock index was at 5,514.67. The index is now at 5,499.62 and prices of Eurodollar zero coupon bonds are currently 0.9888 and 0.9715, for 60 and 150 days, respectively.  What is the value the swap?

5.   Explain how a currency swap is analogous to a bond transaction.