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2 December, 01:26

A $100 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, the six-month LIBOR is exchanged semi-annually for 12% per annum. The six-month LIBOR rate in swaps of all maturities is currently 10% per annum with continuous compounding. The six-month LIBOR rate was 9.6% per annum two months ago. What is the current value of the swap to the party paying floating? What is it's value to the party paying fixed?

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  1. 2 December, 02:24
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    Fixed = 12% (exchanged for = receive)

    Floating = LIBOR = 9.6% two months ago

    Remaining life of swap = 10 months

    6 month LIBOR rate for all maturities = 10% (used for discounting)

    Receive:

    Fixed = [ (100) (0.12) (6/12) * e - 0.10 * (4/12) ] + 106e - 0.10 * (10/12) = $103,328,005

    Pay:

    Floating = {100 + [ (100) (.096) (.5) ]} * e -.10 * (4/12) = $101,364,247

    Value of swap to party paying floating: $103,328,004.6 - $101,364,247.3 = $1,963,757

    Value of swap to party paying fixed =

    - $1,963,757
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