Swaptions

CFA Level II Portfolio Management
#1

Dear all,

Please help with the following.

Schweser Book#5 - Page 122 - Challenge Problems #12.

The receiver swaption is in-the-money (market rate at expiration is 6,8% versus fixed rate of 6%), which allows for a $2.000 payment every each quarter.

The thing is, when you bring these $2.000 payments to their present values, what is the meaning of using 90,180,270 and 360 day discount factors if the “receive fixed” payments are supposed to be fixed?

Thanks a lot,

Gabriel

#2

This is a time-value-of-money situation where instead of having 1 discount rate for a series of cash flows, we have several. These discount rates are based on the corresponding market (LIBOR) rate at the time of payment.

#3

Good, thanks.