Question

The five-year swap rate when cash flows are exchanged semiannually is $4 \%$. A company wants a swap where it receives payments at $4.2 \%$ per annum on a principal of $$\$ 10$$ million. The OIS zero curve is flat at $3.6 \%$. How much should a derivatives dealer charge the company. All rates are expressed with semiannual compounding. (Ignore bid-offer spreads.)

   The five-year swap rate when cash flows are exchanged semiannually is $4 \%$. A company wants a swap where it receives payments at $4.2 \%$ per annum on a principal of $$\$ 10$$ million. The OIS zero curve is flat at $3.6 \%$. How much should a derivatives dealer charge the company. All rates are expressed with semiannual compounding. (Ignore bid-offer spreads.)

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Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 7, Problem 26

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Step 1

The fixed leg of the swap is receiving payments at a rate of $4.2\%$ per annum on a principal of $10$ million. Since the cash flows are exchanged semiannually, the semiannual fixed rate is $4.2\% / 2 = 2.1\%$. The number of periods is 5 years * 2 = 10 Show more…

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The five-year swap rate when cash flows are exchanged semiannually is $4 \%$. A company wants a swap where it receives payments at $4.2 \%$ per annum on a principal of $$\$ 10$$ million. The OIS zero curve is flat at $3.6 \%$. How much should a derivatives dealer charge the company. All rates are expressed with semiannual compounding. (Ignore bid-offer spreads.)

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