Swaps

CFA Level II
#1

Cal Smart wrote a 90-day receiver swaption on a 1-year LIBOR-based semiannual-pay $10 million swap with an exercise rate of 3.8 percent. At expiration, the market rate and LIBOR yield curve are: Fixed rate 3.763% 180-days 3.6% 360-days 3.8% The payoff to the writer of the receiver swaption at expiration is: A) $3,600. B) $0. C) -$35,617. D) -$3,600.

#2

D

#3

i also got D. B1 = 1/(1+3.6%/2)=0.982318 B2=1/(1+3.8%)=0.963391 Payoff = (3.763%-3.8%)*0.5*10,000,000*(b1+b2)=-3,600

#4

I’m approximating D, too lazy to calculate the exact figure. But I’m guessing the precise caculation would involve finding the difference between the swaption and current fixed rates at each semi-annual pay period discounted using the 180 day and 360 day rates provided.

#5

yup, there it is maratikus

#6

nice work guys… its def. D… I got confused with the opt. portion on the question…

#7

I agree, Black Swan. It’s not worth calculating as long as we remember the right approach.

#8

I don’t understand how you got the answer, I know swaps but I have no idea how to swaptions

#9

chadtap Wrote: ------------------------------------------------------- > Cal Smart wrote a 90-day receiver swaption on a > 1-year LIBOR-based semiannual-pay $10 million swap > with an exercise rate of 3.8 percent. At > expiration, the market rate and LIBOR yield curve > are: > > Fixed rate 3.763% > 180-days 3.6% > 360-days 3.8% > > The payoff to the writer of the receiver swaption > at expiration is: > deep2002, The writer of a receiver swaption has the obligation to enter into a swap with a fixed rate of 3.8% as the fixed payer (buyer of receiver swaption has right to receive floating). So as the fixed payer you will benefit if fixed prices go down, but if they do then the long of won’t exercise the swaption (read option). Keep in mind that the long (receive floating) can also immediately take the opposite side of the swap (at market rates) and fix his profit.

#10

thanks for going over it mwvt9, Its starting to slowly sink…time to take on some swap questions to see if it sticks in :slight_smile:

#11

mwvt9 Wrote: ------------------------------------------------------- >> >> The writer of a receiver swaption has the > obligation to enter into a swap with a fixed rate > of 3.8% as the fixed payer (buyer of receiver > swaption has right to receive floating). > mwvt9, bit confused here: option writer is obligated to pay fixed,so the receiver option buyer has the right to receive the fix rate ,correct? . i hope you made a typo. please confirm

#12

Good catch. Typo on my part. The long has the right to receive fixed (pay floating) and the short has the obligation to pay fixed (receive floating). Apologies to deep2002.

#13

yes…mwvt… I think that’s a typo buyer of a receiver swaption has the option to receive fixed…not floating…

#14

Hey mumu…where you been?

#15

hi…had my head buried in PM…feel like its a big black hole…and i’ve just been falling further and further in… :frowning: i need some cheering up :frowning:

#16

Sorry…I can’t help much in the cheery department. Impending failure looms large these days. :slight_smile:

#17

hahha…we need a hug…from JDV… maybe some of his IQ will rub off’ve us!

#18

thanks for the clear up everyone…and I know for a fact you two will pass. You guys answer all the questions – so you can’t fail because you guys are a product of AF :smiley: