HW8solutions_fall11

HW8solutions_fall11 - (98.56-98.5/1.035 2(98.56-99.75/1.04...

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Homework 8, FINA 471 Fall, 2011 1. A. The seller pays = (98.5 – 98)*100000 = \$50,000. 2. C. The buyer pays = (98 – 96.75)*100000 = \$125,000. 3. B. The swap price = (97.5/1.02 + 98.5/1.025 2 + 99.75/1.03 3 )/(1/1.02 + 1/1.025 2 + 1/1.03 3 ) = \$98.56. 4. B. The swap price 98.56 is higher than the 1-year and 2-year forward prices (97.5 and 98.5). So the dealer underpays in the first two settlements but overpays in the third settlement. Therefore the remaining value is negative. 5. D. We discount the cash flows using the new rates. PV(net cash flows) = (98.56-97.5)/1.03 +
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Unformatted text preview: (98.56-98.5)/1.035 2 + (98.56-99.75)/1.04 3 = \$0.037. 6. A. We discount the cash flows using the new rates. PV(net cash flows) = (98.56-97.5)/1.005 + (98.56-98.5)/1.01 2 + (98.56-99.75)/1.015 3 = -\$0.024. 7. B. The dealer receives 100000000*(0.03-0.025) = 0.5 million. 8. A. The dealer receives 100000000*(0.03-0.035) = -0.5 million. 9. C. We use the par coupon rate formula: R = (1 – 0.97)/(0.995 + 0.985 + 0.97) = 1.017%. 10. A. The dealer receives euro, which becomes stronger....
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This note was uploaded on 01/16/2012 for the course FINA 442 taught by Professor Ms.etheridge during the Fall '11 term at South Carolina.

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