1. What is the value of a 5-year swap where LIBOR is paid in the usual way and in return LIBOR compounded at LIBOR is received on the other side? The principal on both sides is $100 million. Payment dates on the pay side and compounding dates on the receive side are every 6 months and the yield curve is flat at 5% with semiannual compounding.
2. Explain carefully why a bank might choose to discount cash flows on a currency swap at a rate slightly different from LIBOR.