Calculate the value of an instrument

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Reference no: EM131241069

The yield curve is flat at 10% per annum with annual compounding. Calculate the value of an instrument where, in 5 years' time, the 2-year swap rate (with annual compounding) is received and a fixed rate of 10% is paid. Both are applied to a notional principal of $100.

Assume that the volatility of the swap rate is 20% per annum. Explain why the value of the instrument is different from zero.

Reference no: EM131241069

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