Hull OFOD11 e Solutions CH 34
Hull OFOD11 e Solutions CH 34
Swaps Revisited
Practice Questions
34.1.
Results are as follows:
The fixed rate day count convention is Actual/365. There are 181 days between January 11,
2021, and July 11, 2021. This means that the fixed payments on July 12, 2021, is
181
002 100 000 000 $991, 781
365
Other fixed payments are calculated similarly.
34.2
Yes. The swap is the same as one on twice the principal where half the fixed rate is
exchanged for floating.
34.3
The final fixed payment is in millions of dollars:
[(1.5 × 1.0165 + 1.5) × 1.0165 + 1.5] × 1.0165 + 1.5 = 6.1501
The final floating payment assuming forward rates are realized is
[(1.55× 1.016 + 1.55)× 1.016 + 1.55] × 1.016 + 1.55= 6.3504
The value of the swap is therefore the present value of – 0.2003 or – 0.2003/(1.0154)
= – 0.1887. This makes the small approximation discussed in footnote 1 of Chapter 34.
34.4
The value is zero. The receive side is the same as the pay side with the cash flows
compounded forward at the risk-free rate. Compounding cash flows forward at the risk-free
rate does not change their value.
34.5
Suppose that the fixed rate accrues only when the floating reference rate is below RX and
above RY where RY RX . In this case, the swap is a regular swap plus two series of binary
options, one for each day of the life of the swap. Using the notation in the text, the risk-
neutral probability that the floating reference rate will be above RX on day i is N (d2 ) where
ln( Fi RX ) i2ti2 2
d2
i ti
The probability that it will be below RY where RY RX is N (d 2) where
ln( Fi RY ) i2ti2 2
d 2
i ti
From the viewpoint of the party paying fixed, the swap is a regular swap plus binary options.
The binary options corresponding to day i have a total value of
QL
P(0 si )[ N (d 2 ) N ( d 2)]
n2
(This ignores the small timing adjustment mentioned in Section 34.6.)
34.6
There are four payments of USD 0.4 million. The present value in millions of dollars is
0.4/1.02+0.4/1.022+0.4/1.023+0.4/1.024=1.5231
The forward Australian floating rate is 5% with annual compounding. The quanto adjustment
to the floating payment at time ti 1 is
34.7
When the CP rate is 6.5% and Treasury rates are 6% with semiannual compounding, the
CMT% is 6% and an Excel spreadsheet can be used to show that the price of a 30-year bond
with a 6.25% coupon is about 103.46. The spread is zero and the rate paid by P&G is 5.75%.
When the CP rate is 7.5% and Treasury rates are 7% with semiannual compounding, the
CMT% is 7% and the price of a 30-year bond with a 6.25% coupon is about 90.65. The
spread is therefore,
max[0 (985 7 578 9065) 100]
or 28.64%. The rate paid by P&G is 35.39%.