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At initiation of a two payment swap (”ultra plain vanilla”), due in exactly 180 days for the first legs, and then exactly one year from today for the second and final legs, the value is equivalent to fixed receiver and floating receiver. Fixed rate is 3.0%, while future 6 month rate is 3.25%. Notional amounts are equivalent for both counterparties at $100,000. Spot at inception is 2.9%.

a. How much is the future floating rate for the second 6-month period?

b. If spot LIBOR rate ends up dropping steadily to 2.6%, then which counterparty would benefit from having entered into the fixed-floating rate swap?

c. If spot LIBOR rate ends up increasing to 3.25% and moving up from there an additional 10 basis points, then which counterparty would benefit from having entered into the fixed-floating rate swap?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92800247

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