Interest Rate Derivative
1. A corporation agrees to pay on a $25 million one year swap. The settlement terms are “advanced set, settle in arrears.” The day count for both sides of the swap are actual/360. The fixed rate on the swap is 2.25% and the swap is initiated December, 2018. Assume the following day count and LIBOR fixing are observed: LIBOR DayCount a. December 2018 2.00% b. March 2019 2.15% 90days (Dec 2018 to March 2019) c. June 2019 2.45% 92days (March 2019 to June 2019) d. September 2019 2.90% 91days (June 2019 to September 2019) e. December 20169 92days (September 2019 to December 2019) List all 4 payments made or received by the corporation as a result of the swap. March: June: September: December: 2. It costs AAPL 3.85% to borrow in the fixed rate market and 3mLIBOR +25 to borrow in the floating rate markets for 2 years. Two year Swap rates are quoted at 3.65%/3.66% by a Swaps dealer. Assuming they want to have a floating rate liability, how could they utilize the swaps market to lower their borrowing costs and by how many basis points? 3. You enter into a 3-month (assume 90 days) LIBOR based forward rate agreement with a notional of $25mm and fix a rate of 3.25%. 3-Month LIBOR rates rise to 4.00% at expiration. What is the payoff on the agreement? 4. Assume you are a floating rate borrower. Circle the position you would take in each of the following instruments to protect yourself against a rise in LIBOR rates: (you will circle one position for each type of derivative, i.e. whether you would Pay or Receive on a swap). Position (circle one for each derivative) a. Swaps PAY RECEIVE b. FRA LONG SHORT c. EuroDollar Futures LONG SHORT d. IR Option Call Put e. Swaption Payer Receiver
