Explanation:
Swap rates essentially represent par yields for standard swap maturities. A core mathematical property of the yield curve is that when the curve is upward-sloping (as indicated by increasing swap rates: 1.00%, 1.60%, 1.88%), the spot rate curve must lie above the swap rate (par yield) curve. Therefore, the implied 1.5-year spot rate must be strictly greater than the 1.5-year swap rate of 1.88%. Looking at the provided options, only 1.93% is greater than 1.88%. By elimination, 1.93% is the correct spot rate.
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Q.48 A trader at a derivatives trading desk is explaining the relationship between spot and swap rates to his intern. As an example, he wants to extract the 1.5-year spot rate from the swap rates structure presented below:
| Term in Years | Swap Rate |
|---|---|
| 0.5 | 1.00% |
| 1.0 | 1.60% |
| 1.5 | 1.88% |
What is the implied 1.5-year spot rate?
A
1.70%.
B
0.80%.
C
1.88%.
D
1.93%.