Q1: Pricing Interest Rate Swap
A. Price a plain vanilla one-year interest rate swap with quarterly settlements and $100 million notional principal. The current term structure of LIBOR is given in the table below. Use the 30/360 day count method.
B. What is the quarterly fixed rate payment?
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Term structure of interst rates |
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Maturity |
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90 |
5.85% |
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180 |
5.85% |
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270 |
6.24% |
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360 |
6.65% |
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NP |
$100,000,000 |
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Settlement period |
90 |
days |
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Day count (30/360) |
360 |
days |
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| A. Fixed Rate |
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% per annum |
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| B. Fixed Rate Payment |
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(in US dollar) |
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Q2: Interest swap value
ABC bank has agreed to receive 3-month LIBOR and pay 8% per annum on a notional principal of $100 million. The swap has a remaining life of 11 months. The LIBOR spot rates for 2-month, 5-month, 8-month, and 11-month, are 6.5%, 7%, 7.5%, and 8%, respectively. The 3-month LIBOR rate at the last payment date was 6%. Estimate the value of the swap to ABC Bank by estimating the values of the floating leg and the fixed leg. Use the 30/360 day count method.
A. The present value of the fixed leg?
B. The present value of the floating leg?
C. The value of the swap to ABC bank?
Q3:Currency Swap Pricing
On August 15th, 2013, ABC bank negotiated a 2-year currency swap with TRI Corp., paying Euro fixed and receiving USD floating with a notional principal of $100 million. The semi-annual settlement is on every February 15 and August 15 until maturity. The spot FX rate on 8/15/2013 is $1.33 per €1.00. The term structure of interest rates on 8/15/2013 are in the table below.
The day count method used is 30/360.
A. What is the notional principal in euro?
B. What is the fixed rate in euro?
C. What is the amount in euro ABC bank has to pay on Feb 15, 2014?
D. What is the amount in U.S. dollar TRI Corp. has to pay on Feb 15, 2014?
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Notional principal |
$100,000,000 |
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FX rate |
$1.33 |
per €1.00 |
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Day count |
30 |
360 |
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Settlement Period |
180 |
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Term Structure of Interest Rates |
8/15/2013 |
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Maturity |
LIBOR (US $) |
EURIBOR |
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####### |
6.20% |
6.00% |
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####### |
6.30% |
6.50% |
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####### |
6.70% |
6.50% |
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####### |
7.00% |
7.00% |
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Q4: Currency Swap Value
On September 15th, 2013, ABC bank entered into a 2-year currency swap contract with GV Manufacturing, paying Euro fixed 6% and receiving USD floating with notional principal of $133 million and €100. The semi-annual settlements are on every September 15 and March 15 until maturity. It is now November 15th, 2013, two months after the contract start date. The spot FX rates on 9/15/2013 and 11/15/2013 are $1.33 and $1.30 per €1.00, respectively. The new term structure of interest rates on 11/15/2013 are in the table below. The day count method used is 30/360. The 6-month LIBOR rate at the last payment date was 5%.
A. What is the present value of all the cash flows of the floating leg (in USD) on 11/15/2013?
B. What is the present value of all the cash flows of the fixed leg (in Euro) on 11/15/2013?
C. What is the present value of the swap to ABC bank on 11/15/2013?
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Notional principal |
$133,000,000 |
€ 100,000,000 |
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Swap EURO Fixed Rate |
6.00% |
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6-mo LIBOR (USD) on 15SEP2013 |
5.00% |
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FX rate |
$1.30 |
per €1.00 on |
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Day count |
30 |
360 |
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Settlement Period |
180 |
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Term Structure of Interest Rates |
11/15/2013 |
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Maturity |
LIBOR (US $) |
EURIBOR |
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3/15/2014 |
6.40% |
6.00% |
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9/15/2014 |
6.40% |
6.50% |
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3/15/2015 |
7.00% |
6.50% |
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9/15/2015 |
7.00% |
7.00% |
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ANSWERS |
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A. Value of Floating Leg (in USD) |
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B. Value of Fixed Leg (in Euro) |
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C. Value of the swap (in USD) |
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