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Answer: -924,458
To value the interest rate swap with 2.5 years remaining, we need to calculate the present value of the fixed leg payments and compare it to the floating leg. The swap has a fixed rate of 5% paid quarterly, while current market rates are lower (2.96% for 2 years and 3.075% for 3 years). Since the fixed payer is paying 5% when current rates are around 3%, this swap has negative value to the fixed payer. The exact calculation involves: - Interpolating the swap rate for 2.5 years - Calculating the present value of fixed payments at 5% - Calculating the present value using the current market rate - The difference gives the swap value The correct answer is -924,458, which represents the negative value to the party paying fixed at 5% when current rates are much lower.
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You are required to estimate the value of an interest rate swap that has 2.5 years left in its life. Suppose that a fixed rate of 5% is paid and Libor is received every three months. The notional principal is USD 20 million. Now we can find a new 2-year swap where 2.96% is received and Libor is paid. Also, we can find a new 3-year one with a swap rate of 3.075%. Suppose the risk-free rate is 3.6% for all maturities and all rates are compounded quarterly.
A
-916,522
B
-924,458