Suppose that OIS rates of all maturities are 6% per annum, continuously compounded. The one-year LIBOR...
Suppose that OIS rates of all maturities are 6% per annum, continuously compounded. The one-year LIBOR rate is 6.4%, annually compounded and the two-year swap rate for a swap where payments are exchanged annually is 6.8%, annually compounded. Which of the following is closest to the LIBOR forward rate for the second year when LIBOR discounting is used and the rate is expressed with annual compounding
Homework Answers
In two-year swap forward rate corresponding to first exchange is one-year zero rate or 6.4%. That is, when fixed rate is paid, value of the exchange per $100 in principal is $100*(6.4%-6.8%)e^(−6%*1)=-$0.3767. If F is forward rate for 2nd year, then (F-6.8%)e^(-6%*2)=0.3767 implying F=0.07225 or 7.225%
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Suppose that OIS rates of all maturities are 6% per annum, continuously compounded. The one-year LIBOR...
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