Chapter 7 In an interest rate swap, a financial institution pays 6% per annum an

Question

Chapter 7
In an interest rate swap, a financial institution pays 6% per annum and receives 3-month LIBOR
in return on a notional principal of $100 million with payments being exchanged every three
months. The swap has a remaining life of 14 months. This implies the next cashflow will be
exchanged in 2 months.
The current LIBOR rate is 8% per annum for all maturities. The 3-month LIBOR rate 1 months
ago was 10% per annum.
All rates are compounded quarterly.
What is the value of the swap to this financial institution?

Explanation / Answer

http://www.math.umn.edu/~spirn/5075/Lecture9.pdf http://www.math.umn.edu/~merev001/5021_solutions_5.pdf

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