5 II. Your firm is paying 3-month LIBDR and receiving the fixed rate of 3.641% {annualized} on a notional principal of liltl million. It is Dec. l5…

a. What are the values for 3-month LIBOR that one could lock in by trading futures at these prices?

b. Suppose 3-month LIBOR on the next two payment dates turns out to be equal to the values you calculated in part a. What will be the dollar amounts of the three swap payments you will have to make or receive based on the current spot rate and those two forward rates? Each actual cash payment will be made at the end of the relevant period, that is, three months after the repricing date on which the interest rate is set. (Treat the payment periods as 1/4 of a year; the question is not about day-count conventions.) Assume your obligation and that of your counterparty are netted, and only the difference between them is paid by the counterparty with the larger obligation.

c. Suppose you have bought an interest rate cap contract instead of a swap, with a strike level of 3.60%. What will be the dollar values of the payments on the cap you will receive based on each of those rates? (Recall that with a cap, there will be no payment on the first repricing date in March.)

d. What is the market value of the swap contract in part b., assuming these are the only payments.

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