How the swaption might be used by a corporation

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Reference no: EM131241084

Use the DerivaGem software to value a European swaption that gives you the right in 2 years to enter into a 5-year swap in which you pay a fixed rate of 6% and receive floating. Cash flows are exchanged semiannually on the swap. The 1-year, 2-year, 5-year, and 10-year zero-coupon interest rates (continuously compounded) are 5%, 6%, 6.5%, and 7%, respectively.

Assume a principal of $100 and a volatility of 15% per annum. Give an example of how the swaption might be used by a corporation. What bond option is equivalent to the swaption?

Reference no: EM131241084

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