Chapter 4

Problems
4.1 Consider a $30 million notional amount interest rate swap with a fixed rate of 7 percent,
paid quarterly on the basis of 90 days in the quarter and 360 days in the year. The first
floating payment is set at 7.2 percent. Calculate the first net payment and identify which
party, the party paying fixed or the party paying floating, pays.
4.2 Consider a currency swap for $10 million and SF 15 million. One party pays dollars at
a fixed rate of 9 percent, and the other pays Swiss francs at a fixed rate of 8 percent. The
payments are made semiannually based on the exact day count and 360 days in a year. The
current period has 181 days. Calculate the next payment each party makes.
4.3 Consider a $100 million equity swap with semiannual payments. When the swap is
established, the underlying stock is at 1,215.52. One party pays a fixed rate of 5.5 percent
based on the assumption of 30 days per month and 360 days in a year. If the stock index is
at 1,275.89 on the first payment date, calculate the net swap payment, indicating which
party pays it.
4.4 A corporation enters into a $35 million notional amount 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:
Days Rate (%)
90 7.00
180 7.25
270 7.45
370 7.55

a. Determine the fixed rate on the swap.

b. Calculate the first net payment on the swap.
c. Assume that it is now 30 days into the life of the swap. The new term structure of
LIBOR is as follows:
Days Rate (%)
60 6.80
150 7.05
240 7.15
330 7.20

Calculate the value of the swap.

4.5 A U.S. corporation is considering entering into a currency swap that will call for the
firm to pay dollars and receive British pounds. The dollar notional amount will be $35
million. The swap will call for semiannual payments using the adjustment 180/360. The
exchange rate is $1.60. The term structures of dollar LIBOR and pound LIBOR are as
follows:
 Days Dollar LIBOR (%) Pound LIBOR (%)
180 7.00 6.50
360 7.25 7.10
540 7.45 7.50
720 7.55 8.00

Answer the following questions.

a. Determine the appropriate pound notional amount. Use this result in each of the
remaining questions.
b. Determine the fixed rates in dollars and in pounds.
c. For each of the following cases, determine the first payment on the swap:
i. Dollars fixed, pounds fixed
ii. Dollars fixed, pounds floating
iii. Dollars floating, pounds floating
iv. Dollars floating, pounds fixed
d. Now assume it is 120 days into the life of the swap. The new exchange rate is $1.42.
The new term structures are as follows:
Days Dollar LIBOR (%) Pound LIBOR (%)
60 6.80 6.40
240 7.05 6.90
420 7.15 7.30
600 7.20 7.45

Determine the value of the swap for each of the following cases:
i. Dollars fixed, pounds fixed
ii. Dollars fixed, pounds floating
iii. Dollars floating, pounds floating
iv. Dollars floating, pounds fixed
4.6 A pension fund wants to enter into a six-month equity swap with a notional amount of
$60 million. Payments will occur in 90 and 180 days. The swap will allow the fund to
receive the return on a stock index, currently at 5,514.67. The fund is considering three
different types of swaps - one of which would require it to pay a fixed rate; another that
would require it to pay floating rate; and another that would require it to pay the return on
another stock index, which is currently at 1,212.98. Refer to these as swaps 1, 2, and 3. The
term structure is as follows:
Term Rate (%) Discount Bond Rate
90 days 9
180 days 10
 a. Find the fixed rate for swap 1.
b. Find the payments on day 90 for swaps 1, 2, and 3. For swap 3, assume that on day
90, stock index 1 is at 5,609.81 and stock index 2 is at 1,231.94. Be sure to indicate the
net payment.
c. Assume it is 30 days into the life of the swap. Stock index 1 is at 5,499.62, and
stock index 2 is at 1,201.45. The new term structure is as follows:
Term Rate (%) Discount Bond Rate
60 days 6.8
150 days 7.05

Find the values of swaps 1, 2, and 3.