Swaption payoff question

CFA Level II
#21

Wait, don’t we need to discount this back?

#22

lets see if you guys got it… lets try this one!!! i’ll post the answer in a few… (original question was posted by smarshy). ------------------------------------------------------------------------------ ------------------------------------------------------------------------------ The London Interbank Offered Rate (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) $25,356. D) $50,712.

#23

Ans : D

#24

I’m getting 56,926 and that’s not even an option…

#25

^^me too mumu

#26

barthezz…you sure you posted alll the info? seems like something’s missing there…

#27

mumu, that’s what I was thinking. wouldn’t you have to know the rate at expiration, then calculate the P/L and discount it back by 180 and 360 days if this is semi annual?

#28

mumukada, all info you need is posted

#29

hint: calculate the equivalent fix payment based on LIBOR first

#30

you guys need to calculate the fixed payment based not on libor for 360 but on discount factors hint

#31

it is D

#32

why can’t you use the 360-day libor as your new fixed rate??..that’s a 1 year rate … florinpop…can you show your calcs…

#33

ah, D

#34

yes calculate discount factor based on libor 0.9746 and 0.9487 then calculate fixed payment (1-0.94870/(0.9746+0.9487) rate is 0.0266 that is annual 5.32% calculate difference in payments 5.32-4.8=0.52%*10mil discount back and you have 50717

#35

aaah…got it!

#36

thanks flor

#37

ooops…a bit late :)… good question though…tricky…

#38

here’s the link to the thread… http://www.analystforum.com/phorums/read.php?12,729262,729470#msg-729470 the calculations are as follows… ALWAYS start with a TIMELINE. you can enter this swap by paying the 4.8% and receiving an equivalent fix payment of 5.32% based on LIBOR. 180-days: 5.2%…discount factor…0.97466 360-days: 5.4%…discount factor…0.94877 thus the swap coupon is 0.0266365 or 5.32% p.a. #1. you receive x-----------------------180days-----------------------------------360days PV?------------------266365.38---------------------------------266365.38+10Mio -----<0.97466 -------------------------------------------------<0.94877---------- #2. you pay (exercise rate = 4.8%) x-----------------------180days-----------------------------------360days PV?--------------------240000-------------------------------------240000+10Mio -----<0.97466 -------------------------------------------------<0.94877---------- whether you net the PMTs or subtract the PVs is up to you. I did: (266365-240000) * (0.97466+0.94877) = 50,711 so ans D.

#39

good job florin!

#40

anyways even if you did not know how to solve you could have chosen the right ans you know the sign and you can approximate that 1 y libor can’t be that far off from 1 y interest rate