Question: You are a swap dealer and you have the following deals on your book: Long
• 2-year receiver vanilla interest-rate swap, at 6.75% p.a. 30/360. USD N = 50 million.
• 3-year receiver vanilla interest-rate swap, at 7.00% p.a. 30/360. USD N = 10 million. Short
• 5-year receiver vanilla interest-rate swap, at 7.55% p.a. 30/360. USD N = 10 million.
a. Show the cash flows of each swap.
b. What is your net position in terms of cash flows? Show this on a graph.
c. Calculate the present values of each swap using the swap curve:
Maturity Bid-Ask
2 6.75-6.80
3 6.88-6.92
4 7.02-7.00
5 7.45-7.50
6 8.00-8.05
d. What is your net position in terms of present value?
e. How would you hedge this with a 4-year swap? Which position would you take, and what should the notional amount be?
f. Where would you go to get this hedge?
g. Can you suggest another hedge?