mwvt9 Wrote: ------------------------------------------------------- > Smarshy, > > I think it is really important that you understand > the concept here so you can apply it to questions > you get on this topic in the future. > > When you are long a payer swaption you have the > RIGHT to enter into a swap as the fixed rate > payer. Swaptions are always defined by the fixed > rate. So the long in a receiver swaptions REC > fixed rate payments and the long in a PAYER > swaptions pay the fixed rate. > > For exam purposes these will always be european > options. So at expiration of the swaption you > have the RIGHT to enter a swap as the fixed rate > payer. This will only have value if the MARKET > rates for fixed rates are higher than the rate in > the swaption. > > In this case you have the right to enter a swap as > a fixed rate payer at 4.8%. At the exact same > time though you could go the the MARKET and enter > into the opposite side of a swap with the same > duration (floating rates will cancel). In this > case, you are going to enter into a swap as the > fixed rate RECEIVER at 5.32%. > > When you do this you are going to lock in a > profit. The profit is going to be the difference > between what you REC minus what you PAY at each > date. In our example it will be 26,000 on each > payment date. > > So what are these 26,000 dollar payments worth to > you today? Discount them back to todays value and > you have your value today, which is the 50K number > we arrived at. > > I hope I am not talking down to you, but in your > orginal post it appeared that you were having > trouble with the overall idea here. mwvt9, Thanks very much for taking the time to explain that. I actually do understand the basic premise, and when i see a swaption exercize price of 4.8 when LIBOR is at 5.3% I do immediatly see that there is profit to be locked in. Where I seem to be slowing down is when you all of a sudden jump to “So what are these 26,000 dollar payments worth to you today? Discount them back to todays value and you have your value today, which is the 50K number we arrived at” I think, “where the F did $26k payments come from?” I get the big picture, it’s the mechanics that are giving me trouble.
I see you explained the 26k now. Should have read more closely. Thanks!
Well like I said I didn’t want to talk down to you, but I want to see you pass this exam and these are question where you can pick up points on the rest of the field because they give up as soon as they see swaps.
so tell me if the way i did it is incorrect. i think maybe nib was saying this. i usually go the way everyone else did it, but for whatever reason i did this and got 50,678 like you guys i get .02663 vs. .024 semiannual payments then i got the difference between the two: .00263 and multiplied by 10mm to get the payment of 26,347.098 at each period. then i multiplied by the two pv factors and got 50,678. is the difference in the rounding?
cfasf should be rounding error.
yeah. thinks so. thanks for the confirm.
Has to be rounding.