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Calculation of Fixed Rate of The Swap

This document contains information about calculating the fixed rate of a 4-year Libor-based interest rate swap with annual resets. It provides a table of present value factors and calculates the fixed rate of 1.6% using those factors and a formula. It also contains information about a forward foreign exchange contract for USD and GBP, including the calculation of the future forward price.

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Beshoy Zakaria
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57 views

Calculation of Fixed Rate of The Swap

This document contains information about calculating the fixed rate of a 4-year Libor-based interest rate swap with annual resets. It provides a table of present value factors and calculates the fixed rate of 1.6% using those factors and a formula. It also contains information about a forward foreign exchange contract for USD and GBP, including the calculation of the future forward price.

Uploaded by

Beshoy Zakaria
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Suppose we are pricing a four-year Libor-based interest rate swap with annual resets (30/360

day count). The estimated present value factors, are given in the below table: The fixed rate of
the swap is:

Calculation of fixed rate of the swap:

r = (1-PV of 4th year) / Sum of PV of all 1 to 4 years

r = (1-0.9385) / (0.9901+0.97787+0.9654+0.9385)

r = 0.0615 / 3.8719

r = 1.6%
AZ Corp. sold USD10,000,000 against GBP forward at a forward rate of £0.8200 for $1 at Time
0. In the spot market at Time t, $1 is worth £0.7600, and the annually compounded risk-free
rates are 1.00% for the British pound and 3.00% for the USD. Assume at Time t the forward
contract has one month to expiration. The forward price Ft(£/$,T) at Time t will be closest to: *

Forward price = {Spot price(£/$)*(1+risk free rate for british pound)^n}/(1+ risk free rate
US dollar)^n

n= 1 month, that is 1/12

=0.76*(1.01)^1/12 / (1.03)^1/12

=0.76*(0.998)

=0.75
Assume an investor bought a one-year forward contract with price F0(T) = 110. Six
months later, at Time t = 0.5, the price of the stock is S0.5 = 115 and the interest rate is
4%. The value of the existing forward contract expiring in six months will be closest to: *
The forward value at time t for a long forward contract initiated at time 0 is:

Q1) Option B
 stock trading at €50, pays a €1.00 dividend in three months. The price of the forward contract
on this stock expiring in six months will most likely decrease if there is a(n):

Increases in dividend (will decrease the forward price beacause dividend is reduced
while caluculating forward contract)
The spot rate and forward rate for the US Dollar-Chinese Yuan pair is expressed as number of
CNY per unit of USD. The forward price for such a currency contract will be calculated as:

Future price of the spot exchange rate using the CNY interest rate adjusted for the USD interest
rate.
Suppose an investor buys a one-year equity futures contract and there are now three months to
expiration. Today’s futures price is 111.30. There are no other cash flows. The futures contract
value after marking to market, will be closest to:
Which of the following is least likely a feature of currency swaps? Currency swaps:

1. Option C, involve payment in different currency unit on each leg of the swap. Usually
currency swap there is netting off and settlement is in one currency
The three-month GBP Libor and the six-month GBP Libor based on the current market quotes is
0.39% and 0.52% respectively. Assume a 30/360-day count convention. The 3 × 6 FRA fixed
rate will be closest to:

Disount Factor for the 3 month rate = 1 / (1 + 0.0039 x 90/360) = 0.99903

Discount factor for the 6 month rate = 1 / (1 + 0.0052 x 180/360) = 0.99741

Quarterly fixed rate = 1 - 0.99741 / (0.99903 + 0.99741) = 0.0013 or 0.13%


Annual fixed rate = 0.13 x 4 = 0.52%

The correct answer is 0.52%


The one-year forward price of an underlying which pays a dividend in six months is given by:

FUTURE VALUE OF UNDERLYING LESS FUTURE VALUE OF CARRYING


BENEFITS

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