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BUS325 Derivative Securities

Swaps Questions

1.

On-market Currency Swap


Assuming a mid-rate of 8.9% p.a. is paid on five year GBP interest rate swaps (dealers
spread is + 10 bps). Construct a five year plain vanilla currency swap between Bill Ltd and
Ben Ltd who are in the following position:

Bill Ltd:

Ben Ltd:

Income
USD 16 million
@USDlibor+2.5%

Liability
GBP 10 million
@ 8.5% p.a.

GBP 10 million
@ 10% p.a.

USD 16 million
@ USD libor flat

Assume an initial exchange rate of GBP/USD = 1.6000.


Diagram all interest flows.

2.

Off-market Swap
A client has requested a four year off-market currency swap with a plain-vanilla
configuration, in order to receive 9% fixed rate EUR against floating rate USD. Ignoring the
dealers spread, calculate the required floating rate payment, if on-market swaps are priced
as 7% EUR against USD libor, and 4% USD against USD libor.

3.

Tom Ltd has borrowed 2 million USD by issuing debentures which mature in exactly five
years at a coupon rate of 10% p.a. paid semi-annually. Jerry Ltd has borrowed 2.6 million
EUR for five years at the floating rate of six month Libor plus 1.0% p.a., with semi-annual
interest payments.
Tom has income which is essentially floating rate EUR, whilst Jerry has predominantly
fixed rate USD income. Accordingly, both Tom and Jerry have approached you as a swap
dealer and requested that you arrange for an on-market swap that will reduce both their
exchange rate and interest rate risk.
The following data has been gathered:
PVAF(10,4.0%):

8.111

(ie A10 4.0% )

PVAF(10,2.0%):

8.983

(ie A10 2.0% )

USD/EUR spot rate:

1 USD = 1.3 EUR

Five year swap mid-rate:

8.0% p.a. USD against 6-month EUR Libor flat.


4.0% p.a. EUR against 6-month EUR Libor flat.
For dealer pays fixed-rate, subtract 10 basis points, for dealer receives fixed, add
10 basis points.

4.

i)

Diagram the interest and income flows for a swap that would meet their requirements.

ii)

If, in exactly six months time, the exchange rate was 1USD = 1.38 EUR, what would
be Jerrys net interest payments (as a result of the swap and direct borrowing) on that
date?

iii)

If Tom wished to receive 10% pa USD payments semi-annually from an off-market


swap, what floating rate payments should you require?

Pricing the Mid-rate


Calculate the USD mid-rate for a one year bullet swap with quarterly (assume 91 day
intervals) payments against GBP libor, given the following 3 month libor futures
market prices:
Expiry Date (months):
Yield (% pa):

5.

0
7.65

3
7.75

6
7.83

9
7.90

Indicative Pricing Schedule


Quotations for eurodollar time deposit futures contracts traded on the Chicago
Mercantile Exchange are presented overleaf. The contracts are based on three month
(90 day) libor, and are settled on the second last London trading day before the third
Wednesday of the month. For simplicity, assume that they are settled on the 1st of
each month, in order to calculate the indicative pricing schedule for plain-vanilla
USD interest rate swaps.
The data has been saved into an excel file Eurodollar Futures Data which can be
copied from webCT. (It is recommended that you use the formulae given in the notes
in a spread-sheet program for this exercise.)
____________________________________

PIT FUTURES
CME Eurodollar Futures

Pit-Traded prices as of 09/01/06 04:00 pm (cst)

MTH/
STRIKE
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
TOTAL
TOTAL

OPEN
94.6
------94.655
------94.79
94.935
95.055
95.12
95.125
95.12
95.09
95.035
94.98
94.94
94.91
94.865
94.825
94.79
94.745
94.705
94.685
94.66
94.68
94.645
94.63
94.605
94.58
94.545
94.535
94.51
-------------------------------------

--- SESSION
--HIGH
LOW
94.6075
------94.69
------94.81
94.955
95.07
95.135
95.155
95.14
95.105
95.065
95.025
94.985B
94.94
94.895
94.865
94.83
94.795
94.755
94.735
94.71
94.68
94.645
94.63
94.605
94.58
94.545
94.535
94.51
-------------------------------------

94.595A
------94.63
------94.75
94.88
94.995
95.055
95.08
95.065A
95.035
95
94.97
94.925
94.89A
94.845A
94.815A
94.78A
94.745
94.705
94.685
94.66
94.64A
94.605A
94.59A
94.565A
94.54A
94.505A
94.495A
94.47A
94.445A
94.41A
94.40A
94.375A
94.35A
94.32A
94.31A
94.29A
94.265A
94.235A
94.23A
94.21A

LAST

SETT

94.605

PT
CHGE

EST
VOL

---- PRIOR ---DAY


SETT VOL
INT

94.605 UNCH
13K
94.595
0.5
94.61
0.5
94.655 UNCH
21K
94.73
1.5
94.77
1.5
94.8
1.5 18K
94.945
2 20K
95.06
1.5 21K
95.125
1.5 25K
95.145
2 22K
95.13
2 19K
95.1
2 13K
95.055
1.5
8655
95.02
1.5 10K
94.98
1.5
8205
94.94
1.5
2429
94.89
1
2172
94.86
1
2241
94.825
1
2684
94.79
1
2086
94.75
1
1925
94.73
1
1945
94.705
1
1895
94.68
1
1132
94.645
1
1136
94.63
1
1121
94.605
1
1121
94.58
1
105
94.545
1
105
94.535
1
105
94.51
1
105
94.485
1
94.45
1
94.44
1
94.415
1
94.39
1
94.36
1
94.35
1
94.33
1
94.305
1
94.275
1
94.27
1
94.25
1
EST. VO L
225249

------94.66
------94.805
94.945
95.065
95.13
95.15
95.135
95.1
95.055
95.02
94.98
94.94
94.89
94.86
94.82
94.79
94.75
94.73
94.705
94.68
94.645
94.63
94.605
94.58
94.545
94.535
94.51
94.475
94.44
94.43
94.405
94.38
94.35
94.34
94.32
94.295
94.265
94.26
94.24

94.605
225852
368355
94.59
1353
12388
94.605
79
2211
94.655
405422
596114
94.715
54
54
94.755
94.785
297936
317170
94.925
273295
79828
95.045
369435
141196
95.11
239292
967005
95.125
159996
635890
95.11
105354
433863
95.08
31075
305843
95.04
43104
313199
95.005
20541
286688
94.965
12497
211156
94.925
11779
143008
94.88
7099
123549
94.85
6367
104176
94.815
5866
104456
94.78
5431
95637
94.74
5800
79667
94.72
5718
57945
94.695
5674
41753
94.67
3104
28969
94.635
2739
21910
94.62
2883
16893
94.595
2634
13899
94.57
289
9090
94.535
288
6840
94.525
287
5805
94.5
287
3520
94.475
5
2002
94.44
5
1516
94.43
5
1783
94.405
5
1456
94.38
5
3292
94.35
5
1257
94.34
5
753
94.32
5
687
94.295
5
1283
94.265
5
494
94.26
5
599
94.24
5
1665
V
OL OPE N INT.
22515 90 10
544864