Suppose that a commodity’s respective forward prices for 1 year and 2 years are

Question

Suppose that a commodity’s respective forward prices for 1 year and 2 years are $55 and $63. The 1-year effective annual interest rate is 6.1%, and the 2-year interest rate is 6.4%. You will pay a fixed rate of $58.87033 in a 2-year swap and receive the floating rate. At the time you enter the swap contract, its value to you is...(show work)

a. $–0.0236

b. $–0.0169

c. $0.0236

d. $0.0169

Suppose the 1-year effective annual interest rate is 3.3%, the 2-year interest rate is 4.1%, and the 3-year interest rate is 4.7%. Compute the fixed rate in a 3-year interest rate swap.(show work)

b. 5.03%

c. 4.92%

d. 4.01%

e. 11.11%

Explanation / Answer

Ans 1) At the intiation of swap contract is always zero otherwise no one will enter in the swap or someone make profit at the intiation only and close it position by taking another trade.

Ans 2) Fixed rate = 3 * ( 1- 1/1.047)/(1/1.047 + 1/1.041 + 1/1.033) = 4.66%

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