A Semi-Annual Pay Interest Rate Swap Where the Fixed Rate

question 12

Multiple Choice

A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual compounding) has a remaining life of nine months. The six-month LIBOR rate observed three months ago was 4.85% with semi-annual compounding. Today's three and nine month LIBOR rates are 5.3% and 5.8% (continuously compounded) respectively. From this it can be calculated that the forward LIBOR rate for the period between three- and nine-months is 6.14% with semi-annual compounding. If the swap has a principal value of $15,000,000, what is the value of the swap to the party receiving a fixed rate of interest? Assume OIS rates are the same as LIBOR rates.

• A) $74,250
• B) −$70,760
• C) −$11,250
• D) $103,790

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