How a forward swap is like swaption and how it is different

Reference no: EM13925840

1. Explain how a forward swap is like a swaption and how it is different.

2. Suppose a firm plans to borrow $5 million in 180 days. The loan will be taken out at whatever LIBOR is on the day the loan begins and will be repaid in one lump sum, 90 days later. The firm would like to lock in the rate it pays so it enters into a forward rate agreement with its bank. The bank agrees to lock in a rate of 12 percent.

Determine the annualized cost of the loan for each of the following outcomes. Interest is based on 90 days and a 360-day year.

a. LIBOR in 180 days is 14 percent.

b. LIBOR in 180 days is 8 percent.

Reference no: EM13925840

Questions Cloud

Show the effect of the above transaction on a statements : Show the effect of the above transaction on a statements model like the one shown below:

Standard deviations of the mean : The math grades on the final exam varied greatly. Using the scores below, how many scores were within one standard deviation of the mean? How many scores were within two standard deviations of the mean?

What is its final temperature : When 1.60 ? 105 J of heat enters a cherry pie initially at 20.0°C, its entropy increases by 470 J/K. What is its final temperature?

Dodge brothers began building their own automobiles : In 1914, the Dodge Brothers began building their own automobiles after opening their machining shop in 1901 and contracting with such notable companies as Ford and Oldsmobile. Since that time, the company, now Chrysler Group LLC, has been through ..

How a forward swap is like swaption and how it is different : Explain how a forward swap is like a swaption and how it is different. Determine the annualized cost of the loan for each of the following outcomes. Interest is based on 90 days and a 360-day year.

Consumer decision-making process paper : The consumer decision making process is used by marketers to make important marketing decisions. When a consumer decides to buy a product they follow through the course of realizing the problem, searching for information, evaluating the alternativ..

How much heat must the engine exhaust : We supply 132 J of heat to an engine with 11.2 % efficiency. How much work (J) can the engine do and How much heat (J) must the engine exhaust?

The products sold in transaction : Prepare an income statement, statement of changes in stockholders equity, balance sheet, and statement of cash flows for 2013.

Find value of fra from perspective of the party paying fixed : Find the value of the FRA from the perspective of the party paying fixed and receiving floating as of the point in time at which the above term structure applies.

User Account

All Pages