Even though I am not collecting your graph, I suggest that you draw it to practice for the final.

Diagram an interest rate risk swap.

Start by drawing 2 boxes.

Label them Firm A and Commercial Bank.

Firm A gets a $300,000 loan from their neighborhood commercial bank.

Each month for 5 years, Firm A must pay the commercial bank a principle payment and an interest payment of the principle times LIBOR + .06. (LIBOR stands for the London Interbank Offer Rate, it is a base interest rate used when banks lend money to each-other. It is common practice to base commercial and mortgage loan interest rates off of LIBOR instead of the US Federal Funds Rate. LIBOR is a more volatile rate than the Fed rate.)

Firm A’s monthly payment: prin + prin * (LIBOR + .06)   

Draw the flows between Firm A and the commercial bank.

True or False: Firm A and the commercial bank have entered into a derivative contract.