Question 1 On 3/5/2012, you entered into a semiannual interest rate swap contrac

Question

Question 1

On 3/5/2012, you entered into a semiannual interest rate swap contract, where you pay a fixed rate of 4% per annum and receive 6-m LIBOR on a principal amount of $1,000,000. Suppose the 6-m LIBOR rates were 5.00% on 3/5/2012 and 5.50% on 9/5/2012. What is the net cash flow of the swap contract on 9/5/2012?

Question 2

An interest rate is 13.16% per annum expressed with continuous compounding. What is the equivalent rate with semiannual compounding? (margin of error: +/- 0.02%)

Question 3

The three year zero rate is 5.9% and the four year zero rate is 6.2% (both continuously compounded). What is the forward rate (continuously compounded) for the fourth year? Report in % and round the number to the nearest 2 decimal percentage points such as 5.78%. (margin of error = +/- 0.05%)

Question 4

A trader sells 100 European put options (1 contract) with a strike price of $48 and a time to maturity of six months. The price received for each option is $3. The price of the underlying asset is $40 in six months. What is the trader's gain or loss? If loss, report a negative number.

Explanation / Answer

Question 1

The amount of interest paid by me = 1,000,000*4%*6/12 = $20,000
On 9/5/12 LIBOR is 5.5%, hence the amount of interest received = 1,000,000*5.5%*6/12 = $27,500

Thus, net cash flow on 9/5/12 = -20,000 + 27,500 = $7,500

Question 2

Let the semi-annual compounding rate be

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