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Estimate the value of the swap

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Reference no: EM133072021

Problem: Suppose that a bank has agreed to the following terms of an interest rate swap:

  • The notional principal is CAD 300 million and the remaining life of the swap is 11 months.
  • The bank pays 8% per annum, and receives three-month LIBOR.
  • Payments are exchanged every three months.
  • The swap (fixed) rate is 11% per annum for all maturities.
  • The three-month LIBOR rate a month ago was 12.5% per annum. All rates are compounded quarterly.

Estimate the value of the swap using a) a bond-price valuation method, and b) a FRAs-based method?

Reference no: EM133072021

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