Which of the following is equivalent to a receive-fixed swap with a tenor of one and a half years with semi-annual swap payments and a fixed rate of 5% (exchanged for London Interbank Offered Rate (LIBOR))? Assume that the notional principal is $10,000,000. A) A forward rate agreement, which obligates the party to receive a fixed rate of 5% and pay six-month LIBOR on a notional principal of $10,000,000. B) A strip of three forward rate agreements, which obligates the party to receive a fixed rate of 5% and pay six-month LIBOR on a notional principal of $10,000,000. C) A strip of two forward rate agreements, which obligates the party to receive a fixed rate of 5% and pay six-month LIBOR on a notional principal of $10,000,000.

C

yes

Isn’t it B because it’s a 1.5 year swap, and there are 3 payments?

my answer: B was incorrect. The correct answer was C) A strip of two forward rate agreements, which obligates the party to receive a fixed rate of 5% and pay six-month LIBOR on a notional principal of $10,000,000. This is an example of two 6-month forward rate agreements (FRAs). The first FRA is entered into at time 0 with the payment determined at 6 months and paid at 12 months. The second FRA is entered into at 6 months with the payment determined at 12 months and paid at 18 months.

the thing that throws me off here is what happens at the end of 6 months? There is no payment because the fixed and floating rate for the 6 month period are the same?

What about the payment to be made in 6 months? Wouldn’t they have to enter into an FRA that is based on today’s LIBOR paid 6 months from now? Or would they just make that payment on t=0 based on the present value of that type of agreement?

at t=1 they pay based on LIBOR0 at t=2 they pay based on LIBOR1 at t=3 they pay based on LIBOR2 you already know LIBOR0 when you entered the contract.

the libor term isnt stated in the question so you really cant answer it in my opinion