What bond option is equivalent to the swap option

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Reference no: EM131408604

Use the DerivaGem software to value a European swap option that gives you the right in two years to enter into a 5-year swap in which you pay a fixed rate of 6% and receive floating. Cash flows are exchanged semiannually on the swap. The 1-year, 2-year, 5-year, and 10-year zero-coupon interest rates (continuously compounded) are 5%, 6%, 6.5%, and 7%, respectively. Assume a principal of $100 and a volatility of 15% per annum. Give an example of how the swap option might be used by a corporation. What bond option is equivalent to the swap option?

Reference no: EM131408604

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