Suppose that you are a swap bank and you notice that interest rates on zero coupon bonds are as shown.Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR. $\begin{array}{lccc}
\text { Zero Rates } & 1 \text {-year } & \text { 2-year } & 3 \text {-year } \
\text { USD } & \$ 3 \% & \$ 4 \% & \$ 5 \% \
\text { Euro } & € 2 \% & € 3 \% & € 4 \%
\end{array}$ In other words,what will you be willing to pay in euro against receiving USD LIBOR?
A)5 percent
B)4 percent
C)3 percent
D)2 percent

Question

Quizplus · Accepted Answer

The swap bank should be willing to pay the 3-year euro rate of 3% to receive the USD LIBOR, as this is the rate at which it can borrow euros for 3 years.

Suppose That You Are a Swap Bank and You Notice