Assume that Caterpillar’s return on investments is 2.50% per annum for the next four years. Next, suppose that Caterpillar and UBS (a financial institution) enter the following four year interest rate swap: Catepillar pays X% per annum fixed to UBS and receives LIBOR from UBS. All payments are made annually. Catepillar’s net return after it enters the swap is (LIBOR + 0.75%) per annum. In this case, Catepillar transforms ___________ into __________ and X equals to ________. a. Floating Rate Investment; Fixed Rate Investment; 1.75% b. Fixed Rate Investment; Floating Rate Investment; 3.25% c. Floating Rate Liability; Fixed Rate Liability; 3.25% d. Fixed Rate Investment; Floating Rate Investment; 3.50% e. Fixed Rate Investment; Floating Rate Investment; 1.75%

Assume that Caterpillar’s return on investments is 2.50% per annum for the next four years. Next, suppose that Caterpillar and UBS (a financial institution) enter the following four year interest rate swap: Catepillar pays X% per annum fixed to UBS and receives LIBOR from UBS. All payments are made annually. Catepillar’s net return after it enters the swap is (LIBOR + 0.75%) per annum. In this case, Catepillar transforms _ into and X equals to . a. Floating Rate Investment; Fixed Rate Investment; 1.75% b. Fixed Rate Investment; Floating Rate Investment; 3.25% c. Floating Rate Liability; Fixed Rate Liability; 3.25% d. Fixed Rate Investment; Floating Rate Investment; 3.50% e. Fixed Rate Investment; Floating Rate Investment; 1.75%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 2P

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Suppose you have a 2.5-year remaining on an interest rate swap with a notionalprincipal of $10, 000, 000 between Company A and Company B. Company A pays fixed rateand Company B pays the float rate. Fixed and float payments are exchanged every year andthe last payment was exchanged 6 months ago. The fixed rate is 3.5% per annum, and thefloating rate is tied to the annual LIBOR. The previous 1-year LIBOR rate, set 6 months ago,is 2.75%, 6 month LIBOR is 3.25%. the 1.5-year LIBOR is 3.25%, and the 2.5-year LIBOR is3.50%.Calculate the present value of the fixed and floating legs of the swap, and determine the swap’snet present value from Company A’s perspective. Assume annual compounding for discounting.
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?
Suppose the 1-year and 2-year OIS rates are 2% and 4%, respectively. Consider an OISswap with two years to maturity where you receive 3% and pay the floating reference ratewith principal 1 million. If the payments are made annually with annual compounding, what is the value of the swap
Suppose the three-year swap rate for a swap with annual payments is 3.2% and that OIS (risk-free) zero rates for maturities of one, two and three years are 2.5%, 2.7% and 2.9% respectively. What is the value of a three-year swap where 4% is received and TSOFR is paid on a principal of $100 million? All rates are annually compounded.
An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 2% is paid and 12-month LIBOR is received. A exchange of payments has just taken place. The one-year, two-year and three- year LIBOR/swap zero rates are 2%, 3% and 4%. All rates an annually compounded. What is the value of the swap as a percentage of the principal when LIBOR discounting * is used
Suppose the 1-year and 2-year OIS rates are 2% and 4%, respectively. Consider an OIS swap with two years to maturity where you receive 3% and pay the floating reference rate with principal 1 million. If the payments are made annually with annual compounding the value of the swap is (a)−558.4 (b)−188.5 (c) 0 (d) 188.5 (e) 558.4
Use the following information for questions 12-15: Under the terms of an interest rate swap, a financial institution has agreed to pay 10% per annum and to receive the 3-month LIBOR in return on a notional principal of $50 million with payments exchanged every 3 months. The swap has a remaining life of 14 months. The current rate being swapped for 3- month LIBOR is 11.8% per annum for all maturities. The 3-month LIBOR rate 1 month ago was 12% per annum. All rates are compounded quarterly.
Suppose that a commodity’s respective forward prices for 1 year and 2 years are $150 and $158. The 1-year effective annual interest rate is 5.9%, and the 2-year interest rate is 6.6%. You will pay a fixed rate of $153.85906 in a 2-year swap and receive the floating rate. At the time you enter the swap contract, its value to you is... A.$0.0084 B.$–0.0084 C.$0.0051 D.. $–0.0051 E.$000000
Suppose that some time ago a financial institution entered into a swap where it agreed to make semiannual payments at a rate of 3.5% per annum and receive LIBOR on a notional principal of $300 million. The swap now has a remaining life of 1.15 years. Payments will therefore be made 0.15, 0.65, and 1.15 years from today. The risk-free rates with continuous compounding for maturities of 0.15, 0.65, and 1.15 years are 2.8%, 3.2%, and 3.4%, respectively. We suppose that the forward LIBOR rates for the 0.15-to- 0.65 year and the 0.65-to-1.15 year periods are 3.4% and 3.7%, respectively, with semiannual compounding. The LIBOR rate applicable to the exchange in 0.15 years was determined 0.35 years ago. Suppose it is 2.9% with semiannual compounding. What is the floating cash flow at time 1.15 (in $ millions)?
An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 5% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 4%, 5% and 6%. All rates are annually compounded. What is the value of the swap as a percentage of the principal ($100) when OIS and LIBOR rates are the same? (
An interest rate swap has three years of remaining life. Payments are exchanged annually. Interest at 2% is paid and 12-month LIBOR is received. An exchange of payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero rates are 2%, 3% and 5%. All rates are annually compounded. What is the value of the swap as a percentage of the $100 principal value?
Your firm has semi-annual floating rate payment obligations for the next two years computed on a nominal value of $10M. You observe the following LIBOR spot rates: 6 months = 1.5%, 12 months = 2%, 18 months =2.2%, 24 months=2.5%. Find the swap fixed rate. How would you use the swap in order to hedge your position (floating rate payment obligations)?