The 4%-strike six-month Libor-based two-year cap and floor are trading at $2.30 and $2.55, respectively. Assume that the cap has 4 caplets maturing in 6 months, 1 year, 18 months, and 24 months, respectively, and that the floor similarly has 4 floorlets. What is the NPV at inception of a two-year swap in which you are paying Libor versus receiving 4%?
A) $- \$ 0.25$
B) $0
C) $0.25
D) There is not enough information to determine the price of the swap.

Question

Quizplus · Accepted Answer

The NPV of the swap is equal to the present value of the difference between the cap and floor payments. The cap payments are equal to the difference between the strike rate and the Libor rate, capped at 4%. The floor payments are equal to the difference between the Libor rate and the strike rate, floored at 4%. The present value of the cap payments is $2.30, and the present value of the floor payments is $2.55. Therefore, the NPV of the swap is $2.55 - $2.30 = $0.25.

The 4%-Strike Six-Month Libor-Based Two-Year Cap and Floor Are Trading −$0.25- \$ 0.25−$0.25

The 4%-Strike Six-Month Libor-Based Two-Year Cap and Floor Are Trading $- \$ 0.25$