The LIBOR yield curve is: 180-days 5.2% 360-days 5.4% What is the value of a LIBOR-based payer swaption (expiring today) on a $10 million 1-year 4.8 percent swap? A) $0. B) $50,712. C) -$50,712. D) $25,356. Your answer: C was incorrect. The correct answer was B) $50,712. Determine the discount factors 180 day: 1 / [1 + (0.052 × (180/360))] = 0.974659 360 day: 1 / [1 + (0.054 × (360/360))] = 0.948767 Then plug as follows: (1 − 0.9487666) / (0.974659 + 0.9487667) = 0.026637 The value of the receiver swaption is the savings between the exercise rate and the market rate: (0.026637 - 0.024) × (0.97465887 + 0.9487666) × 10,000,000 = $50,712. QUERY - the question asks to value the payer option… but the answer is valuing the receiver option… is the answer given correct… thanks in advance…
I don’t see anything incorrect here, looks like the payer value to me. The payer is paying 4.8% fixed, getting the higher floating rate, why wouldn’t it be a positive value. My question is why it didn’t specify that it was on the 180 day rate, I assumed it would be the 360 day rate as this is a one year swap?