Construct the implied term structure of libor rates. what, Ask an Expert

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You observe the following anticipated floating rate swap payments, each based on a notional $ 100 M. Assume semi-annual compounding.

Floating Payments

t=0 0.5 1 1.5

1 year swap 1M 1.1M

1.5 year swap 1M 1.1M 1.12M

a. Construct the implied term structure of LIBOR rates. What are the corresponding swap rates?

b. You plan to sign a 1.5 year Eurodollar loan today (t = 0) for $l,000,000 for 1% over LIBOR. What is the "no arbitrage" forecast of the interest payments you will make at the end of each 6 month period?

c. Rates may go up and your floating rate payments increase. Conceptually, how would you hedge this possibility?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M953986

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