Getting killed by Derivatives… For question #11
Looking at the answer, i got everything right up until they calculate the market value at expiration of the receiver swaption. They are taking the difference between the swapotion rate of 6.5% and the market rate at expiration of 5.3%. Got that, but then they mutiple this difference by the sum of the PV factors (3.88) which gives a value of .012. They then multiple this amount by the notional pricing of 100m to get a market value of 1.2m.
I did it differently. I took the difference between the 6.5% and the 5.3% and used this to calculate the quaterly cash flow payments, and then discounted these payments by each corresponding PV factor. Therefore, my answer is slightly lower at $1.194m. Can anyone help me understand what i’m doing wrong? Hoping the book has a mistake but I doubt it