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2. A. Using your *Swap* software along with Libor spot rates and Eurodollar futures data, price a swap with a 3-year tenor, semi-annual payments and an actual/365, fixed rate day count. Assume that interest volatility is 0.80%. Record both the unadjusted and convexity adjusted rates. Then compare these rates with the interest rate swap rates reported in the WSJ-online (under Market Data Center, click on Bonds, Rates, & Credit Markets and look under Libor Swaps). B. Repeat the above question using instead a 5-year tenor. C. Repeat the above question using instead an 10-year tenor. D. Give the unadjusted and convexity-adjusted values of a $30mm, pay floating/receive fixed swap with semiannual payments that matures on June 15, 2019. The swaps fixed rate is 1.8000% (act/365) and the 6-month the Libor rate in effect for the current period is 0.41126%. (If you can, try to verify this Libor rate at: www.wsj.com (see Market Data center for the appropriate date, or www.bbalibor.com/rates/historical) (see questions 3 and 4 on next page.)
The next 2 questions deal with the financial crisis: 3. Read the article I will distribute in class Ten Bad Ideas Born of the Financial Crisis. Discuss and feel free to express your own views. 2 pages should suffice. 4. In January 2011, as you may recall, the Financial Crisis Inquiry Commission submitted their highly anticipated Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. (a very large copy of the report (662 pages) can be found at http://www.gpo.gov/fdsys/pkg/GPOFCIC/pdf/GPO-FCIC.pdf) While this report received significant attention in the media, several commissioners dissented including Peter Wallison. Wallison has prepared a separate report that has received less attention titled Dissent from the Majority Report of the Financial Crisis Inquiry Commission. His Dissent report begins on page 441 of the main report in the link above. (I will also send a copy of just that part of it to you via email.) Please read this dissenting report (ok to just focus on pages 1-15, but feel free to read on), and provide a 2 page summary.