Question

The OIS zero curve is flat at $10 \%$ per annum with annual compounding. Calculate the value of an instrument where, in 5 years' time, the 2 -year swap rate (with annual compounding) is received and a fixed rate of $10 \%$ is paid. Both are applied to a notional principal of $$\$ 100$$. Assume that the volatility of the forward swap rate is $20 \%$ per annum and that the 12-month LIBOR-OIS spread is zero. Explain why the value of the instrument is different from zero.

   The OIS zero curve is flat at $10 \%$ per annum with annual compounding. Calculate the value of an instrument where, in 5 years' time, the 2 -year swap rate (with annual compounding) is received and a fixed rate of $10 \%$ is paid. Both are applied to a notional principal of $$\$ 100$$. Assume that the volatility of the forward swap rate is $20 \%$ per annum and that the 12-month LIBOR-OIS spread is zero. Explain why the value of the instrument is different from zero.

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 30, Problem 4

Instant Answer

Step 1

Since the OIS zero curve is flat at $10 \%$ per annum, the discount factor for each year is $1/(1+0.10)^n$, where $n$ is the number of years. In this case, we have a fixed rate payment in 5 years, so the present value of this payment is: $$PV_{fixed} = Show more…

Show all steps

Thanks for your feedback!

The OIS zero curve is flat at $10 \%$ per annum with annual compounding. Calculate the value of an instrument where, in 5 years' time, the 2 -year swap rate (with annual compounding) is received and a fixed rate of $10 \%$ is paid. Both are applied to a notional principal of $$\$ 100$$. Assume that the volatility of the forward swap rate is $20 \%$ per annum and that the 12-month LIBOR-OIS spread is zero. Explain why the value of the instrument is different from zero.

Play audio

Feedback

Ace is your personal tutor. It breaks down any question with clear steps so you can learn.

Start Using Ace

Continue solving this problem

Create a free account to:

View full step-by-step solution
Ask follow-up questions with Ace AI
Save progress and study later

Please give Ace some feedback