Reference no: EM132417264

These are just sample questions, they won't come up on the exam because we already have the answers - e.g. for (a) the value of fixed rate is $102.78m and floating rate is 100.609m. (b) is $22.1m and $30.0m.

(a)  A $100 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, six-month LIBOR is exchanged for 7% per annum (compounded semi-annually). The average of the bid-offer rate being exchanged for six-month LIBOR in swaps of all maturities is currently 5% per annum with continuous compounding. The six-month LIBOR rate was 4.6% per annum two months ago. What is the current value of the swap to the party paying floating? What is its value to the party paying fixed?

(b) A currency swap has a remaining life of 15 months. It involves exchanging interest at 10% on £20 million for interest at 6% on $30 million once per year. The term structure of interest rates in both the UK and the US is currently flat, and if the swap were negotiated today the interest rates exchanged would be 4% in dollars and 7% in sterling. All interest rates are quoted with continuous compounding. The current exchange rate (dollars per pound sterling) is 1.8500. What is the value of the swap to the party paying sterling? What is the value of the swap to the party paying dollars?