Question 8
0 out of 0.1 points
Cement Al-Yamamah has just entered into a two-year floating-for-fixed swap contract, where payments are made every six months.
The 6-month LIBOR is 4.90%. The 6 to 12 months forward LIBOR rate is 5.28% and the 12 to 18 month forward LIBOR rate is 9.78. The
two-year swap rate is 7.1%. If the OIS rate is 3.5% and the term structure of the OIS rate is flat, what is the 18 to 24 month Forward
LIBOR rate? All rates are semi-annually compounded, except for the OIS, which is continuously compounded.
(Round to the closest hundredths. Rates should be in percentage form. E.g. 9.99%)
Selected Answer: 12.34%
Correct Answer: 8.58 ± 0.01
Response
Feedback:
You need to find the present value of the first three payments in the swap as if the floating rates are the LIBOR
forward rates. Add the PV together. From -SUM(PV1, PV2, PV3) get what should be the 18-24 forward LIBOR
rate. Since the swap has just been signed, the sum of the present value of all four payments must be 0.