ProblemSet3SekuritasPendapatanTetapdanDerivatif

DahliaErvina
GemaRamadhanAdrian
JulianaSariSiregar
Question1
You are the treasurer of a company with a 4-year, $20 million FRN outstanding at
LIBOR. You are concerned about rising interest rates in the short term and would like to
refinance at a fixed rate for the next two years. A swap dealer arranges a 2-year plain
vanilla interest rate swap with annual payments in which you pay a fixed rate of 8.1%
and receive LIBOR. The counterparty receives 7.9% and pays LIBOR. Assume that the
counterparty also has fixed-rate debt outstanding at 8%. One-year LIBOR is currently
7%. Diagram and compute each partys net borrowing cost and first year cash flows.
Transaction diagram

Net borrowing cost/profit (dealer) & Net Cash Flow

Company A
Pay fixed
Receive fixed
Pay variable
Net borrowing cost

8%
7.90%
LIBOR
LIBOR + 0.1%

Company B
Pay fixed
Receive fixed
Pay fixed
Net borrowing cost

Dealer
Pay fixed
Receive fixed
Receive variable
Pay variable
Profit

7.90%
8.10%
LIBOR
LIBOR
8.1 -7.9 = 0.2%

LIBOR
LIBOR
8.10%
8.10%

Cash flow:
Company A to Dealer = 7%-7.9%=0.9%
Receive 0.9%*20 m = $ 0.18 million
And to 3rd party Pay 8%*its Debt
Company B (you) to Dealer = 8.1%-7%=1.1%
Pay 1.1%*20 m = $ 0.22 million
And to 3rd party Pay 7%*20m = $ 1.4

million

Question2
A corporation enters into a $35 million notional principal interest rate swap. The swap
calls for the corporation to pay a fixed rate and receive a floating rate of LIBOR. The
payments will be made every 90 days for one year and will be based on the adjustment
factor 90/360. The term structure of LIBOR when the swap is initiated is as follows:

Determine the fixed rate on the swap and calculate the first net payment of the swap.
For each rate, we need to compute the present value (discount) factor (Zi).
Zj = 1/(1 + Sj)j
Day
Z90
Z180
Z270
Z360

= 1/(1+7%)90/360
= 1/(1+7.25%)180/360
= 1/(1+7.45%)270/360
= 1/(1+7.55%)360/360

= 0.983227588
= 0.965609099
= 0.947534835
= 0.929800093

Libor
Rate

90

7%

180

7.25%

The swap fixed rate is then calculated as:

270

7.45%

SFR

360

7.55%

= (1.0 Zn) / ni=1 Zi

Z
0.9832275
88
0.9656090
99
0.9475348
35
0.9298000
93

= (1- 0.92980093)/ (0.983227588 + 0.965609099 + 0.947534835 + 0.929800093)

= 1.8347%

This rate is for 90 days, then annual rate = 1.8347% x 4 = 7.34%

First Net Payment:
Fixed payment

= $35,000,000 x 7.34% x 90/360 = $ 642,250

Floating payment
= $35,000,000 x 7.00% x 90/360 = $ 612,500
Then the Company has to paid = $ 642,250 - $ 612,500 = $ 29,750
Question 3
Suppose that the zero-coupon yield curve based on LIBOR is flat at 4% compounded
continuously. Compute the value of a three-year option on a five-year swap assuming
the swaption gives the holder the right to receive 4.2% fixed. Assume payments are
made semiannually (m = 2) and principal L is 100. Assume also that the volatility of the
forward rate on five-year swaps in three years is 30%.

Payoff from the swaption is cashflow:

Max(0.076 ST,0)
ST is five-year swap in three years. The value of an annuity that provides $1 per year at
the end of years 4,5,6,7 and 8 are 7.958452233

Using blacks and below data to calculate swaption.

Rx = 0.042
F = 0.040
2 0.09
0.3
T3

Rumus Black Scholes sbb:

d1

ln(F / RX ) 0.5 2T
; d2 d1 i ti
i T

ln(0.04 / 0.042) 0.5 * 0.09 * 3

0.16591
0.3*1.73205
d2 0.16591 0.3*1.73205 0.3537
d1

[RX N(d2 ) FN(d1 )] 0.042 N(0.3537) 0.04N(0.1659) 0.009441

Value dari swaption adalah

100
[0.009441]* 7.958452233
2
3.7567

Question 4
During the first six months of the year, yields on long-term government debt have fallen
about 100 basis points. You believe the decline in rates is over, and you are interested in
speculating on a rise in rates. You are, however, unwilling to assume much risk, so you
decide to do an intra market spread. Use the following information to construct a T-bond
futures spread on July 15, and determine the profit when the position is closed on
November 15.

*Assumption T-Bond intramarket spread= 8% for 20 years T-Bond