- Questions You Face The Following Term Structure Of Zero Rates Maturities 0 5 1 0 1 5 2 0 2 5 3 0 3 5 4 0 4 5 5 0 5 5 6 1 (146.68 KiB) Viewed 42 times
Questions You face the following term structure of zero rates. Maturities 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 Zero rate 0.50% 0.60% 0.70% 0.80% 0.90% 1.00% 1.10% 1.20% 1.30% 1.40% 1.50% 1.60% 1.70% 1.80% 1) Compute the discount factors (DFs) for each maturity in Table 1. [10 points) 2) You are working for an investment bank. A client wants to initiate a new interest rate swap with you for a notional of £250 million. They are interested to pay fixed and receive floating. The swap maturity is 7 years with annual payments. What fair fixed rate S will you charge the client to enter into this new swap? [15 points] 3) Look again at exercise 2. After some consideration, you decide that there is no point in offering the client a perfectly fair swap rate. You decide that you want to make £2 million profit today on this interest rate swap. What fixed rate S will you charge the client if you want to make a £2 million profit today? [15 points]