Suppose that the 1-year, 2-year, 3-year, 4-year, and 5-year
Question and Solution
Suppose that the 1-year, 2-year, 3-year, 4-year, and 5-year LIBOR-for-fixed swap rates for swaps with semiannual payment
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Suppose that the 1-year, 2-year, 3-year, 4-year, and 5-year LIBOR-for-fixed swap rates for swaps with semiannual payments are 6%, 6.4%, 6.7%, 6.9%, and 7%. The price of a 5-year semiannual cap with a principal of $100 and a cap rate of 8% is $3. Use DerivaGem to determine: (a) The 5-year flat volatility for caps and floors with LIBOR discounting (b) The floor rate in a zero-cost 5-year collar when the cap rate is 8% and LIBOR discounting is used. (c) Answer (a) and (b) if OIS discounting is used and OIS swap rates are 100 basis points below LIBOR swap rates.
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