hw5 - (Notes: The 6 month swap rate is just the same as 6...

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FINA0301, DERIVATIVE SECURITIES HOMEWORK NUMBER 5 First Semester, 2010 - 2011, Dr A. Carverhill 5.1 Please do McDonald, Questions 8.1, 8.2, page 245. 5.2 What are the oil swap prices in Question 5.1 above, if the interest rates are 3.0%. 3.5%, 4.0% for maturities 1, 2, 3 years (annual compounding)? 5.3 The spreadsheet HW 5 3.xls contains a reconstruction of McDonald, Table 8.4, but on the date 06/02/04, and also some other data. (i) Calculate the zero coupon rates, with continuous compounding, consistent with these ED futures prices. (Hint: start from the PDB prices.) (ii) This spreadsheet also contains the market swap rates on this date, with 6 monthly payments. Bootstrap these to get the PDB prices. Also, calculate the corresponding zero coupon rates, with continuous compounding. (These should closely agree with the answer to Part (i).)
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Unformatted text preview: (Notes: The 6 month swap rate is just the same as 6 month LIBOR. The maturities 1.5, 2.5, 3.5, 4.5 are linearly interpolated from their neighbors, since there is no market for them. To bootstrap from the swap rates, remember the Theorem on Page 2.29 of the notes: You can assume that at each maturity, there is a bond, whose coupon is the swap rate, and which is at par, i.e its price is 100.) (iii) Now bootstrap from the Treasury coupon bond prices given, and calculate the zero coupon rates with continuous compounding. (These prices include “accrued interest”- they are the prices at which the bonds actually trade. ) (iv) How do these compare with the zero coupon rates in Parts (i), (ii)? The difference is known in the market as the “TED Spread” (TED - “Treasury-Eurodollar”). 1...
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This note was uploaded on 11/01/2010 for the course FINA 030 taught by Professor Staff during the Spring '10 term at HKU.

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