An Italian corporation enters into a two-year interest rate swap in euros on April 1, 2000. The swap is based on a principal of €100 million, and the corporation will receive 7% fixed and pay six-month Euribor. Swap payments are semiannual. The 7% fixed rate is quoted as an annual rate using the European method, so the implied semiannual coupon is 3.44% [since (1.0344)² = 1.07]. Two years later, the swap is finally settled, and the following Euribor rates have been observed:
$\begin{array} { c c c c c } \text { Apr. 1, 2000 } & \text { Oct. 1, 2000 } & \text { Apr. 1, 2001 } & \text { Oct. 1, 2001 } & \text { Apr. 1, 2002 } \\\hline 6.5 \% & 7.5 \% & 8 \% & 7.5 \% & 6 \% \\\hline\end{array}$ a. What have the swap payments or receipts for the corporation been on each swap payment date?
b. The same Italian corporation also entered another two-year interest rate swap in euros on April 1, 2000. The swap is based on a principal of €100 million, and the corporation contracted to receive 7% fixed and pay six-month Euribor. On this swap, the payments are annual. Hence, the two successive six-month Euribor are compounded. Assuming that the Euribor rates given in the previous problem have been observed, what have the two annual swap payments been?

Question

An Italian corporation enters into a two-year interest rate swap in euros on April 1, 2000. The swap is based on a principal of €100 million, and the corporation will receive 7% fixed and pay six-month Euribor. Swap payments are semiannual. The 7% fixed rate is quoted as an annual rate using the European method, so the implied semiannual coupon is 3.44% [since (1.0344)² = 1.07]. Two years later, the swap is finally settled, and the following Euribor rates have been observed:

\begin{array} { c c c c c } \text { Apr. 1, 2000 } & \text { Oct. 1, 2000 } & \text { Apr. 1, 2001 } & \text { Oct. 1, 2001 } & \text { Apr. 1, 2002 } \\\hline 6.5 \% & 7.5 \% & 8 \% & 7.5 \% & 6 \% \\\hline\end{array}

a. What have the swap payments or receipts for the corporation been on each swap payment date?
b. The same Italian corporation also entered another two-year interest rate swap in euros on April 1, 2000. The swap is based on a principal of €100 million, and the corporation contracted to receive 7% fixed and pay six-month Euribor. On this swap, the payments are annual. Hence, the two successive six-month Euribor are compounded. Assuming that the Euribor rates given in the previous problem have been observed, what have the two annual swap payments been?

Quizplus · Accepted Answer

The Answer of An Italian corporation enters into a two-year interest rate swap in euros on April 1, 2000. The swap is based on a principal of €100 million, and the corporation will receive 7% fixed and pay six-month Euribor. Swap payments are semiannual. The 7% fixed rate is quoted as an annual rate using the European method, so the implied semiannual coupon is 3.44% [since (1.0344)² = 1.07]. Two years later, the swap is finally settled, and the following Euribor rates have been observed: $$\begin{array} { c c c c c } \text { Apr. 1, 2000 } & \text { Oct. 1, 2000 } & \text { Apr. 1, 2001 } & \text { Oct. 1, 2001 } & \text { Apr. 1, 2002 } \ \hline 6.5 \% & 7.5 \% & 8 \% & 7.5 \% & 6 \% \ \hline \end{array}$$ a. What have the swap payments or receipts for the corporation been on each swap payment date? b. The same Italian corporation also entered another two-year interest rate swap in euros on April 1, 2000. The swap is based on a principal of €100 million, and the corporation contracted to receive 7% fixed and pay six-month Euribor. On this swap, the payments are annual. Hence, the two successive six-month Euribor are compounded. Assuming that the Euribor rates given in the previous problem have been observed, what have the two annual swap payments been?

An Italian Corporation Enters into a Two-Year Interest Rate Swap