AdvancedMultiple choice
From zero rates to a swap valuation · Part 3 of 3
The one-year zero rate is 3% and the two-year zero rate is 4%, both annually compounded. Interest rate swaps on this curve exchange a fixed rate for the floating one-year rate once a year.
You have an existing swap with exactly two years left, on $10 million, in which you pay 3.50% fixed and receive floating. What is it worth to you on this curve?
- AAbout +$91,000
- BAbout −$91,000, because paying fixed is a cost
- CAbout +$96,000, the rate gap times two years of notional
- DZero, since swaps are always worth nothing when first agreed
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