Business, 18.08.2020 19:01 pedropaulofpedrosapp

Analyze a two-year swap agreement to exchange LIBOR for fixed-rate payments on a $100 million notional principal. The first payment will be made in one year; the second in two years. You have the following information on LIBOR rates: One-year spot rate is 2% per year. Forward rate in the second year is 5% per year. What must be the annualized two-year spot LIBOR rate?
Find the floating-rate payments to be made.
Find the present value of the floating-rate payments.
Find the fixed rate that would price the swap correctly.
Now suppose that at T=1, just after the first payments were made, interest rate over year two turns out to be 6% per year (instead of 5% originally estimated). Which party is at a loss now: the one making the fixed payments, or the one making the floating payments? Which party faces credit risk?

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Analyze a two-year swap agreement to exchange LIBOR for fixed-rate payments on a $100 million notion...