God **** it,

Why in the Elan Mock 2 is there a question on valuing a 2 year caplet using a binomial interest rate tree… (Question #8 MOCK 2 PM)

**THIS WILL NOT BE ON THE EXAM.**

God **** it,

Why in the Elan Mock 2 is there a question on valuing a 2 year caplet using a binomial interest rate tree… (Question #8 MOCK 2 PM)

**THIS WILL NOT BE ON THE EXAM.**

Finding the value of a caplet is much easy as compared to finding the value of swap and FRAs.

Swaps are extremely easy… i wish we would get a swap question on exam. Also, FRA is easy too u… my point is we do not need to know how to value a caplet…

Here is how i memorized swaps

MV of Fixed Side = Swap rate * Sum of New PV Factors + Last New PV Factor

MV of Floating Side = 1 + (initial Lo/Frequency) * First New PV Factor

If you understand this… you understand swaps.

Can you please explain me the MV of floating side again??

just Memorize the MV floating side and MV fixed side and you can determine value. In every swap question you are most likely going to need both of these sides. If the swap is Pay Fixed/Recieve Floating then the value is MV FLOATING SIDE - MV FIXED SIDE

on the exam i hope they give us the PV Factors so we dont have to do all the stupid calculations especially if its a quarterly swap

just Memorize the MV floating side and MV fixed side and you can determine value. In every swap question you are most likely going to need both of these sides. If the swap is Pay Fixed/Recieve Floating then the value is MV FLOATING SIDE - MV FIXED SIDE

on the exam i hope they give us the PV Factors so we dont have to do all the stupid calculations especially if its a quarterly swap

MV of Floating Side = 1 + (initial Lo/Frequency) * First New PV Factor

[/quote

Please explain me the above equation.

MV Floating Side = **1+ (initial Lo/Frequency) * First New PV Factor**

Initial Lo is the first rate you see in the term structure on Day 0. For example, if it is semi annual swap there is Lo(180) and Lo(360)… so the input is Lo(180)

Frequency is if its semi annual or quarterly… so in this case its semi annual so it would be 1+ Lo(180)/2

now for the “first new pv factor”… when u calcualte the new pv factors when for example u the term strucutre on day 60… you calcualte the pv factors. the First new pv factor is what is used in the formula.

Thanks a lot.