Project Assignment: SWAPS
Remember that NO collaboration is allowed with anyone. If you have any doubts about the honor code that governs the completion of this assignment, please consult the course syllabus or ask me!
Case: Has Libor lost its stature in derivatives markets?
I. What is the difference between LIBOR and OIS as benchmarks in valuing interest-rate swaps? Is LIBOR a risk-free rate? How was LIBOR manipulated? (MAXIMUM 250 words)
II. Value the interest rate swap (with a notional amount of $100m) by relying on the data provided at the end of the case study. The swap still has 9 months until maturity, and interest rate settlements are quarterly. The fund is receiving 2% in return for paying the 3-month LIBOR. All rates are quoted with compounding frequency that corresponds to the term.
Your analysis has to be done in 3 steps:
i. Compare LIBOR rates to OIS rates at similar maturities
o To compute the 9-month LIBOR rate use a simple linear interpolation.
ii. Compute the 3-month forward LIBOR rates on July 5, 2016 and on October 5, 2016 (read carefully the explanations under Exhibit 4)
iii. Value the swap. Which one has a higher value?
III. Does the valuation of an interest-rate swap in particular, and derivatives in general, depend on who the counterparty is and whether the contract is collateralized? (MAXIMUM 250 words)
Format your assignment according to the following formatting requirements:
i) The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
ii) The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
iii) Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.
Attachment:- Has-LIBOR-Lostits.rar