Question: You are a swap dealer and you have the following deals on your book: Long

• 2-year receiver vanilla interest-rate swap, at 6.75% p.a. 30/360. USD N = 50 million.

• 3-year receiver vanilla interest-rate swap, at 7.00% p.a. 30/360. USD N = 10 million. Short

• 5-year receiver vanilla interest-rate swap, at 7.55% p.a. 30/360. USD N = 10 million.

a. Show the cash flows of each swap.

b. What is your net position in terms of cash flows? Show this on a graph.

c. Calculate the present values of each swap using the swap curve:

Maturity                 Bid-Ask

2                        6.75-6.80

3                        6.88-6.92

4                        7.02-7.00

5                        7.45-7.50

6                        8.00-8.05

d. What is your net position in terms of present value?

e. How would you hedge this with a 4-year swap? Which position would you take, and what should the notional amount be?

f. Where would you go to get this hedge?

g. Can you suggest another hedge?