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Fi 8200 Homework No.

8 (Please do the following assignment independently; due on 11/11)


You are to use market information taken from the WSJ/WSJ-online and cmegroup.com for trading as of Monday, November 4. 1. Your firm has decided to enter a $50 million notional, 1-year, pay fixed/receive floating interest rate swap having two semi-annual settlement dates. Before soliciting quotes from various swap dealers, your CFO has requested you to independently evaluate the swap. (Assume a 360-day year and that there are 180 days in each six-month interval.) Also, do NOT use your *Swap* software on this question. A. "Price" the swap (Act/360) using only current LIBOR spot rates (see the section Money Rates in the WSJ.) You do not need futures prices to answer this problem. B. Based on your answer in (A), what is the "value" of the swap. C. Assume that instantaneously after entering the swap, interest rates increase by 30 basis points. (In other words assume that the rates you got out of the WSJ in part (A) each increase by 30 basis points or 0.30%). What is the new value of the swap? D. Repeat part A, but instead assume that the swap is to have 4 quarterly settlement dates. Assume 90 days in each interval. To get your 270-day zero coupon/spot rate, you may interpolate between the six and one year LIBOR rates.

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.