BASIS POINTS

= 1/100th of 1%
EXAMPLE : 50 BASIS POINTS

BASIS POINTS=( 100N ) ×1 %

BASIS POINTS=(
100 )
50
×1 %

BASIS POINTS=0.5× 0.01

BASIS POINTS=0.005

FORWARD RATE AGREEMENT PAYMENT: SAMPLE PROBLEM NOTE:

COMPUTATION
IF THE PROBLEM IS
R = 4% SILENT:
FRA = 3.5%
NP = $ 5,000,000.00 360 DAYS
P = 180 DAYS
Y = 360 DAYS

FRAP=
(
( ( R−FRAY) × NP × P ) × 1−R1× P
)
(Y )
( )
( )
( 0.04−0.035 ) ×5,000,000 ×180 1
FRAP= ×
360
1+ 0.04 × ( 180
360 )

FRAP=( 0.005 ×5,000,000

360
×180
) ×(
1+ 0.04 ×0.5 )
1

FRAP=( ) ×(
1.02 )
4,500,000 1
360
FRAP=12,500× 0.98039215686274509803921568627451
FRAP=12,254.90 USD

PRESENT VALUE FACTOR/ DISCOUNT FACTOR

NOTE:

( )
1
PVF= USE 5 DECIMAL
1−R × ( )
P
Y PLACES

( )
1
PVF=
1+ 0.04 × ( 180
360 )

PVF=( 1+ 0.041 ×0.5 )

PVF=(
1.02 )
1

PVF=0.98039
SWAP CONTRACT NOTE:
USD LIBOR AS OF 01.10.2014 DISCOUNT • formula depends on
RATES % FACTORS (DFS) frequency of payment
3 MONTHS 0.233% 0.99942
6 MONTHS 0.325% 0.99838 • βfix = NP
9 MONTHS 0.451% 0.99663
12 MONTHS 0.578% 0.99425

FLOATING RATE

( )( )( )( )( )
c 1 1 1 1 βfix
βfl= × + + + +
4 libor 3 m libor 6 m libor 9 m libor 12 m libor 12 m
1+ × 90 1+ × 180 1+ × 270 1+ ×360 1+ × 360
360 360 360 360 360

FIXED RATE
Wherein:
C = Fixed rate
q = Frequency

1−DF n
c=q ×
Σ DF

SAMPLE PROBLEM: FIXED RATE

Given: q = 4
DF = 0.99425 (* always use the discount factor of the last payment)

1−DF n
c=q ×
Σ DF
1−0.99425
c=4 ×
3.98868
0.00575
c=4 ×
3.98868
c=4 × 0.00144157967046742280654251531835
c=0.0057663186818696912261700612734
c=0.57663186818696912261700612734037
c ≈ 0.577 %

0.00577
βfix= × 2,500,000,000
4
βfix=0.0014425 ×2,500,000,000
βfix=3,606,250 USD
 SAMPLE PROBLEM: QUARTERLY FIXED SWAP PAYMENT

( )( )( )( )(
c 1 1 1 1 βfix
βfl= × + + + +
4 libor 3 m libor 6 m libor 9 m libor 12 m libor 12 m
1+ × 90 1+ × 180 1+ × 270 1+ ×360 1+ ×
360 360 360 360 360

0.00233
βfl= ×2,500,000,000
4
βfl=0.0005825 ×2,500,000,000
βfl=1,456,250 USD -> first floating payment

SAMPLE PROBLEM: SWAPS CONTINUATION

USD LIBOR AS OF 01.10.2014 DISCOUNT
RATES % FACTORS (DFS)
1 MONTHS 0.333% 0.99972
4 MONTHS 0.425% 0.99859
7 MONTHS 0.551% 0.99680
10 MONTHS 0.678% 0.99438

βfix=QUARTERLY ¿ SWAP PAYMENT × ΣDF+(NP× 10 M DF )

βfix=3,606,250 ×3.98949+(2,500,000,000× 0.99438)
β fix=2,500,337,098.31 USD

βfl=( FIRST FLOATING PAYMENT + NP)× FIRST TRANSACTION DF

βfl=(1,456,250+2,500,000,000) ×0.99972
βfl=2,500,755,842.25 USD

SWAP COMMPUTATION:
VALUE OF SWAP = VALUE OF FIXED INVESTMENT – VALUE OF FIXED FLOATING RATE
VALUE OF SWAP=2,500,337,098.31−2,500,755,842.25
VALUE OF SWAP=−418,743.94

INTEREST RATE CAPS & FLOORS

SETTLEMENT AMOUNT = ( Benchmark Rate−Strike

100
Rate
) × Notional Amount ×
No . of days
360

NOTE:
USING BENCHMARK RATE: 3.50% (CAP STRIKE RATE) BR = BENCHMARK RATE
CS = CAP STRIKE
SETTLEMENT AMOUNT =( 3.5−3
100 ) ×1,000,000 ×
90
360
FS = FLOOR STRIKE

BR > CS SETTLEMENT

SETTLEMENT AMOUNT =(
100 )
0.5 BR < FS AMOUNT
×1,000,000 × 0.25 BR < CS MEMORANDUM
BR > FS ENTRY
SETTLEMENT AMOUNT =0.005 ×1,000,000 ×0.25
SETTLEMENT AMOUNT =1,250

USING BENCHMARK RATE: 2.5% (CAP STRIKE RATE)

 SETTLEMENT AMOUNT =NO SETTLEMENT AMOUNT -> BECAUSE THE CAP

USING BENCHMARK RATE: 1.50% (FLOOR STRIKE RATE)

SETTLEMENT AMOUNT = ( 1.5−2

100 ) × 1,000,000 ×
90
360
SETTLEMENT AMOUNT =−1,250

FOREIGN EXCHANGE HEDGING SAMPLE PROBLEM

1. MINIMUM VARIANCE HEDGE RATIO

NOTE:

USE 3 DECIMAL
PLACES

MINIMUM VARIANCE HEDGE RATIO=CO−RELATION BET . SPOTS∧FUTURES × ( SDSDFUTURES

SPOT
)
MINIMUM VARIANCE HEDGE RATIO=0.95× ( 0.03
0.06 )
MINIMUM VARIANCE HEDGE RATIO=0.95× 0.5
MINIMUM VARIANCE HEDGE RATIO=0.475

2. HOW MUCH WOULD BE THE OPTIMAL NUMBER OF CONTRACTS

15,000,000 GALLON
42 GALLON = 1 BARREL
314..49 = CONTRACT SIZE

CONTRACT SIZE - CONVERTION

= 314.49 * 42
= 13,208.58 GALLONS

OPTIMAL NUMBER OF CONTRACTS

CONTRACTS=MINIMUM VARIANCE HEDGE RATIO× NOTIONAL PRODUCT ÷ CONTRACT ¿ ¿
CONTRACTS=(0.475 ×15,000,000) ÷13,208.58
CONTRACTS=539.42CONTRACTS

FOREX HEDGING
Interest rate Differential – difference between 2 interest rates of the currencies being traded
Sample problem
Int. Rate differential = 2.50-3.75
= 1.25
 Date of contract duration
PREMIUM∨DISCOUNT =Exchange rates× Interest Rate Differential ×
360
181
PREMIUM∨DISCOUNT =0.7194 ×0.01 25 ×
360
PREMIUM∨DISCOUNT =0.0045

Forward Exchange Rate

= PREMIUM + RATES
= 0.0045 + 0.7194
= 0.7239