CFA topic derivatives Whitney

Hi all,

I really don’t get this, could someone explain it?

Exhibit 2

–US\$718,750.

–US\$2,250,000. –US\$2,875,000.

Per US\$1 of notional principal, the present value of the fixed payments = 0.0084 × (0.9972 + 0.9903 + 0.9772 + 0.9587) + (1 × 0.9587) = 0.9917.

Note that the payments now occur in 45, 135, 225 and 315 days.

Per US\$1 the present value of the floating payments = Present value of first floating payment + Present value of future floating payments = [(.0142 × 90/360) + 1] × 0.9972 = 1.0007.

The market value of the pay floating receive fixed rate swap = US\$250,000,000 × (0.9917 – 1.0007) = –US\$2,250,000.

I really don’t understand the calculations…

Thank you in advance

1. You have fixed SWAP rate and payment frequency given. If payment are quaterly it should be fixed SWAP rate of 0,0084 x 4 = 0,0336.

2. you have divide 0,0336 by frequency, if quaterly it is 0,0084 as it mentioned above.

3. Consider it as ordinary loan with 1 principal+interrest at the last payment, and interest payment at each quarter. So you have to discount each of this payment (only on last payemt you have to add 1 \$ principal) on given period. Note that the discount factors are given or you should calculate them from given discount rates (eg. 45 d, 135 d etc).

4. Sum of discounted interest payment and discounted pricipal + interest payment at last paeriod is fixed payer obligation.

5. Floating payment is also given in the form of eg. 90 d LIBOR etc. You also have to divide by 4 to get quaterly rate of whatever is given as payment frequency same as with fixed rate in point 2

6. Floating payment should be discounted only in first period with correspondent discount factor same as in point 3. You have to add 1 \$ principle on this payment.

7. For floating rate no further period discounting needed. Thus 1 \$ principle + Libor/4 (for quarterly frequency) is discounted by first, 45th day rate. This is floater payer obligation and fixed payer receivable.

8. Multiply difference between floater and fixed rate with notional amount to get fixed payer gain or loss.

• means prefix short, amount what one side pays to another
• means receivable, amount what another side receives

thus

0,9917 - 1,0007 x 25 M\$ means that fixed payer receives 0,9917 x Notional and pays 1,0007 \$ x Notional

Thanks I got it, but still confused on the currency swap of question nr 4 of the same topic exercise. I get different results for the present values ( in bold ):

Per HK\$1 of notional principal, the present value of the fixed payments received on the Hong dollar = 0.0046 × ( 0.9976 + 0.9909 + 0.9834 + 0.9674 ) + (1 × 0.9674 ) = 0.9855.

Per €1 of notional principal, the present value of the fixed payments paid on the euro

= 0.0058 × ( 0.9963 + 0.9888 + 0.9811 + 0.9650 ) + (1 × 0 .9650 ) = 0.9878.

Note that based on the exchange rate of HK\$11.42/€1, the actual notional principal = 1/11.42 = €0.08757.

Present value of euro fixed payments = 0.9878 × 0.08757 = 0.08649.

Present value of euro fixed payments in HK\$ = 0.08649 × 9.96 = 0.8615.

Market value of the swap = HK\$285,500,000 × (0.9855 – 0.8615) = HK\$35,402,000.

Try this method (post at the bottom)…

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/9749056

I just did this question and confused about what rate to use for the fixed payment. Hope someone can help!

In the item set, it states that" Whitney’s first meeting is with Novatel, a US-based company that currently has an outstanding loan of US\$250,000,000 that carries a 5.15% fixed interest rate."

Answer: Per US\$1 of notional principal, the present value of the fixed payments = 0.0084 × (0.9972 + 0.9903 + 0.9772 + 0.9587) + (1 × 0.9587) = 0.9917.

My question is why we dont use 5.15%/4 to calculate the fixed payment? The answer used 0.0084 which is the fixed rate for the swap instead.