5.18.2005

Q&A: What are the cashflows of the following interest rate swap?

...On December 15 an investor enters into $50 million NP swap with a dealer. Payments will be on 15th of March, June, September, December for one year, based on LIBOR. The investor will pay 7.5% fixed and the dealer will pay LIBOR. Interest based on exact day count and 360 days (30 per month).

A: For each period, the net payment = 50,000,000 x (LIBOR - 0.075) x (days/360)

time 12/15 03/15 06/15 09/15 12/15
LIBOR 7.68 7.50 7.06 6.06  
Days in Period   90 92 92 91
The dealer Owes   7.68%*50000000*(90/360)=960,000 7.50%*50000000*(92/360)=958,333 7.06%*50000000*(92/360)=902,111 6.06%*50000000*(91/360)=765,917
The investor Owes   937,500 958,833 958,833 947,917
Net to the investor   22,500 0 -56,222 -182,000

Bonus Points

  • The swap is determined in advance and paid in arrears: the interest amount is reset on each coupon reset date and paid one period after. For example, On day 0, the floating rate is set for the first period and the interest to be paid at that rate on day 90. Then on day 90, the rate is set for the second period and the interest is paid on day 180. This process continues so that on day 270 the rate is set for the last period, and the final interest payment and the principal are paid on day 360.

Category: C++ Quant > Derivatives > Swaps

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