Construct the implied term structure of libor rates

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You observe the following anticipated floating rate swap payments, each based on a notional $ 100 M. Assume semi-annual compounding.

Floating Payments

                                    t=0       0.5       1         1.5

            1 year swap                 1M      1.1M

            1.5 year swap             1M      1.1M   1.12M

Construct the implied term structure of LIBOR rates. What are the corresponding swap rates?

You plan to sign a 1.5 year Eurodollar loan today (t = 0) for $l,000,000 for 1% over LIBOR. What is the “no arbitrage” forecast of the interest payments you will make at the end of each 6 month period?

Rates may go up and your floating rate payments increase. Conceptually, how would you hedge this possibility?

Reference no: EM131448211

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