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Interest rate derivatives
The current term structure of interest rates (cont. compounded) is given as follows:
Ref Rate Forwards:
OIS Zeroes (cont. compounded):
Time (Yrs)
Rate (%)
1
2%
1,8%
10
3,5%
3,3%
A home buyer takes out a variable rate loan of 300000 CHF. The interest rate on the loan is the 3-month €STR plus 100bp, payable quarterly. The principal of the loan will be repaid in full after 10 years. The flat volatility for 10-year-caps is 14%.
a. The home buyer wants to make sure that his net quarterly payments (i.e. interest payments plus payments from the cap) do not exceed 5% per year. Should he buy a cap or sell a cap? Which cap rate must the home buyer choose to achieve his goal?
b. Compute the resulting maximum net quarterly payment (sum of interest payments and payments from the cap per quarter) from the home buyer's point of view!
c. Using DerivaGem, calculate the price of this cap!
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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