quiz3 - notional principal is exchanged for the&nal...

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Name Quiz 3 This particular swap has a $100 million notional principal and will terminate in 15 months. In this swap, GS is paying 6% per annum (semiannual compounding) and is receiving the 6-month LIBOR. Payments are exchanged every 6 months. The term structure of LIBOR rates is currently 5% per annum for all maturities with continuous compounding. The 6-month LIBOR quoted three months ago was 5.5% per annum with semiannual compounding. (a) Draw a diagram illustrating GS±s cash ²ow from the swap. The diagram has to show the timing of cash ²ows (in 3, 9, and 15 months) and the size of the cash ²ows (the &xed payment would be $3 million;
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Unformatted text preview: notional principal is exchanged for the &nal payment)? It is 3 e & : 05 ± 3 = 12 + 3 e & : 05 ± 9 = 12 + 103 e & : 05 ± 15 = 12 = $102 : 61 million. (c) What is the present value of GS±s ²oating rate cash ²ow? It is (5 : 5 = 2 + 100) e & : 05 ± 3 = 12 = $101 : 47 million. The &rst part is the $2.75 million ²oating receipt determined according to the LIBOR rate quoted three months ago. The second part is the ²oating rate bond (priced at par) with two remaining payments. The total would then be discounted back for three months to the present. (d) What should be the current value of the swap to GS? 101 : 47 & 102 : 61 = & $1 : 14 million. Each part will have 0.5 points for a total of 2 points. 1...
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