Chapter14

# Chapter14 - Chapter Fourteen Swap Pricing Answers to...

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Chapter Fourteen Swap Pricing Answers to Problems and Questions 1. If the options are European style you can use the put/call parity model with C – P = 0, meaning K = S (1+R) T . Here we have K = 28.55 x (1.055) 0.5 = 29.32 If the options are American style, a naïve but convenient way to solve this is by using trial and error with the CBOE options calculator. We have the following input variables: S = \$28.55 T = six months R = 5.50% σ = any value; it doesn’t matter. Assume 25%. We find that with a striking price of 29.35 the put premium and the call premium are identical to the nearest penny. 2. The swap price is the fixed interest rate one party to the swap pays. The swap value is the present value of the payments one party makes to the other. The swap can have positive value to one party and negative value to the other. 3. If the swap is at-the-market this means that the swap price is the rate that causes the swap to have zero present value to the parties to the swap. 4. The payoff diagram for a short swap slopes down and to the right like the diagram for a short stock position. You can view this as the simultaneous holding of a short call and a long put, or a short cap and a long floor. 5. The new Libor rates would be Spot ( 0 f 3 ) 5.77% Six Month ( 0 f 6 ) 5.85% Nine Month ( 0 f 9 ) 5.92% Twelve Month ( 0 f 12 ) 5.97% 50

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Chapter Fourteen. Swap Pricing Solve for the 3 x 6 forward rate: 2 4 0585 . 1 4 1 4 0577 . 1 + = + + f 3 f 6 = 5.93% Solve for the 6 x 9 forward rate: 3 2 4 0592 . 1 4 1 4 0585 . 1
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Chapter14 - Chapter Fourteen Swap Pricing Answers to...

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