...for an interest rate swap agreement in which an investor has agreed to pay a dealer 8% fixed interest on a $1,000,000 notional amount ($80,000) for the next five years. In return, the dealer has agreed to pay the investor an interest rate tied to the 1 year LIBOR rate plus 1% on a notional amount of $1,000,000 for the next five years. The swap is determined in advance and paid in arrears. The 1 Year LIBOR rates for the following 2 years are shown below

Period | Year 0 | Year 1 | Year 2 |

LIBOR | 6.50% | 6.75% | 7.00% |

**A**: the deal is obligated to pay (6.50% + 1%) * $1,000,000 = $75,000

*Bonus Points*

- the LIBOR rate for year 0 is used as the swap is determined in advance.
- The net payment is the difference between the obligations of the two counter parties.

*Category: C++ Quant-Derivatives-Swaps*

## No comments:

## Post a Comment