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    Hull OFOD11 e Solutions CH 34

    Uploaded by

    Park Geunhye

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    of 2

    CHAPTER 34

    Swaps Revisited

    Practice Questions

    34.1.
    Results are as follows:

    Days from previous


    Target payment Actual payment to current target Fixed
    date Day of week date pmt dates Payment ($)
    Jul 11, 2021 Sunday Jul 12, 2021 181 991,781
    Jan 11, 2022 Tuesday Jan 11, 2022 184 1,008,219
    Jul 11, 2022 Monday Jul 11, 2022 181 991,971
    Jan 11, 2023 Wednesday Jan 11, 2023 184 1,008,219
    Jul 11, 2023 Tuesday Jul 11, 2023 181 991,781
    Jan 11, 2024 Thursday Jan 11, 2024 184 1,008,219
    Jul 11, 2024 Thursday Jul 11, 2024 182 997,260
    Jan 11, 2025 Saturday Jan 13, 2025 184 3,024,658
    Jul 11, 2025 Friday Jul 11, 2025 181 991,781
    Jan 11, 2026 Sunday Jan 12, 2026 184 1,008,219

    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
     002  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

    0.3 × 0.15 × 0.25ti = 0.01125ti

    The value of the floating payments received is therefore

    0.5/1.02 + 0.5 × 1.01125/1.022 + 0.5 × 1.0225/1.023 + 0.5 × 1.03375/1.024 =1.9355

    The value of the swap is 1.9355 – 1.5231 = 0.4124 million.

    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 (985  7  578  9065)  100]
    or 28.64%. The rate paid by P&G is 35.39%.

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