USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An international investment firm buys an interest rate swap that pays the difference between LIBOR and 6 percent if LIBOR exceeds 6 percent. Current LIBOR is 5 percent. The amount of the option is $1,500,000, and the settlement is every three months. Assume a 360-day year.
-Refer to Exhibit 15.20. Find the payoff if LIBOR closes at 6.3 percent.
A) -$45,000
B) -$11,250
C) $0
D) $11,250
E) $45,000

Question

Quizplus · Accepted Answer

To find the payoff, we must first calculate the difference between LIBOR and 6 percent.

LIBOR - 6% = 6.3% - 6% = 0.3%

Next, we multiply this difference by the notional amount and the time factor:

0.003 x $1,500,000 x (90/360) = $11,250

Therefore, the payoff is $11,250 if LIBOR closes at 6.3 percent. The correct choice is D.