Problem 1: Swaps
Deliverables:
Put together an algebraic expression for the cost of the lender. If your algebraic expression is correct, you will realize that no calculations of the actual Libor rate are needed.
Example with the Prime rate: Prime+50 bp-3.75% +4% -Prime -20 = something like that, but, certainly with Libor.
"Another company would be willing to pay our company a floating rate payment priced at 3-month Libor+25bp, while our company would have an obligation to pay a fixed rate of 5.55% annualized, with quarterly settlements. I'm not overly concerned with the other party's reasons for requiring these payments, so we don't have to calculate the other party's final cost. But we do need to remember that fixed-rate swap payments are made on a semiannual basis, based on 30/90/180/360 Accrual Year Fraction, while floating-rate side payments are being made on a quarterly basis, based on Actual/360 Accrual Year Fraction".
Problem 2: Calls and Puts
Deliverables:
A worksheet showing your calculations of the outcomes for the suggested stock price ranges for the call option buying strategy;
A worksheet showing your calculations of the outcomes for the suggested stock price ranges for the put option buying strategy.
1. One table for calculations on:
a The possible outcomes of buying a call option for $2.10, exercise price $37.50
b Possible price ranges for the underlying stock: 25 30 35 40 45 50 55 60
2 A second table for calculations on:
a The possible outcomes of buying a put option for $1.65, exercise price $37.50
b Possible price ranges for the underlying stock: 25 30 35 40 45 50 55 60