Can you show your working step by step (I\'m having a hard time to understand th

Question

Can you show your working step by step (I'm having a hard time to understand this concept)

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We suppose that the 3-month zero rate (CC) is 3% and the 6-month zero rate (CC) is 3.5%.

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There is an on-the-run swap with maturity 9 months that pays every 6 months the amount 3.2 (i.e. the fixed 2

leg pays 3.2 every 6 months or equivalently the swap rate of this swap is 3.2%). Three months ago the 6-month Libor rate 2

was 3.1% (given on an annual basis). What is the value of this swap (paying the fixed leg and receiving the floating leg)? The value of the swap is given by

Explanation / Answer

value of swap will be given by following formula:

value of swap = ( 100 + libor rate/2)*e^(-r3 * 3/12) - (swap rate/2 * e^(-r3*3/12) + (100 + swaprate/2 )* e^(-r9*9/12))

we need the value of r3 and r9 for the valuation of swap.

value of swap = ( 100 + 3.1/2)*e^(-r3 * 3/12) - (3.2/2 * e^(-r3*3/12) + (100+ 3.2/2 )* e^(-r9*9/12))

by putting the value of r3 and r9 we will give the exact value, though we have value of r3 equal to 3% but we need the value of r9 to find the value of this swap.

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