m48-ch08 shrunk v02

# m48-ch08 shrunk v02 - Chapter 8 Swaps Question 8.1 We first...

This preview shows pages 1–3. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter 8 Swaps Question 8.1. We first solve for the present value of the cost per two barrels: \$22 1 . 06 + \$23 ( 1 . 065 ) 2 = 41 . 033 . We then obtain the swap price per barrel by solving: x 1 . 06 + x ( 1 . 065 ) 2 = 41 . 033 ⇔ x = 22 . 483 , which was to be shown. Question 8.2. a) We first solve for the present value of the cost per three barrels, based on the forward prices: \$20 1 . 06 + \$21 ( 1 . 065 ) 2 + \$22 ( 1 . 07 ) 3 = 55 . 3413 . We then obtain the swap price per barrel by solving: x 1 . 06 + x ( 1 . 065 ) 2 + x ( 1 . 07 ) 3 = 55 . 341 ⇔ x = 20 . 9519 b) We first solve for the present value of the cost per two barrels (year 2 and year 3): \$21 ( 1 . 065 ) 2 + \$22 ( 1 . 07 ) 3 = 36 . 473 . We then obtain the swap price per barrel by solving: x ( 1 . 065 ) 2 + x ( 1 . 07 ) 3 = 36 . 473 ⇔ x = 21 . 481 104 Chapter 8 Swaps Question 8.3. Since the dealer is paying fixed and receiving floating, she generates the cash-flows depicted in column 2. Suppose that the dealer enters into three short forward positions, one contract for each year of the active swap. Her payoffs are depicted in columns 3, and the aggregate net cash flow position is in column 4. Year Net Swap Payment Short Forwards Net Position 1 S 1 − \$20 . 9519 \$20 − S 1 − 0.9519 2 S 1 − \$20 . 9519 \$21 − S 1 + 0.0481 3 S 1 − \$20 . 9519 \$22 − S 1 + 1.0481 We need to discount the net positions to year zero. We have: PV (netCF) = − . 9519 1 . 06 + . 0481 ( 1 . 065 ) 2 + 1 . 0481 ( 1 . 07 ) 3 = . Indeed, the present value of the net cash flow is zero. Question 8.4. The fair swap rate was determined to be \$20.952. Therefore, compared to the forward curve price of \$20 in one year, we are overpaying \$0.952. In year two, this overpayment has increased to \$0 . 952 × 1 . 070024 = 1 . 01866, where we used the appropriate forward rate to calculate the interest payment. In year two, we underpay by \$0.048, so that our total accumulative underpayment is \$0.97066. In year three, this overpayment has increased again to \$0 . 97066 × 1 . 08007 = 1 . 048. However, in year three, we receive a fixed payment of 20.952, which underpays relative to the forward curve price of \$22 by \$22 − \$20 . 952 = 1 . 048. Therefore, our cumulative balance is indeed zero, which was to be shown. Question 8.5. Since the dealer is paying fixed and receiving floating, she generates the cash-flows depicted in column 2. Suppose that the dealer enters into three short forward positions, one contract for each year of the active swap. Her payoffs are depicted in columns 3, and the aggregate net position isyear of the active swap....
View Full Document

{[ snackBarMessage ]}

### Page1 / 8

m48-ch08 shrunk v02 - Chapter 8 Swaps Question 8.1 We first...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online