If I want to have to customize a pay-fixed swap with a tenor of two years with semi-annual swap payments and a dixed rate 6% (exchanged for LIBOR), where the notional principle is $100,000,000.
Why would a strip of three forward rate agreements with a fixed rato of 6% and a receive a six-month LIBOR on the notional principle suffice?
Is it because the three forward rate are equivalent to the three semiannual payments and the last semmiannual payment; to have a total of two years, is the underlying asset after the forward expires?
I think why caroline is askin 3 vs 4, is because all of Schweser qbanks questions refer to 3 strips and not 4… I think they omit the first one because its “known”.
Which of the following is equivalent to a pay-fixed swap with a tenor of two years with semi-annual swap payments and a fixed rate of 6% (exchanged for LIBOR)? The notional principal is $100,000,000.
A: A strip of three forward rate agreements, which obligates the party to pay a fixed rate of 6% and receive six-month LIBOR on a notional principal of $100,000,000.
B. A forward rate agreement, which obligates the party to pay a fixed rate of 6% and receive six-month LIBOR on a notional principal of $100,000,000.
c: A strip of two forward rate agreements, which obligates the party to pay a fixed rate of 6% and receive six-month LIBOR on a notional principal of $100,000,000.
Answer is A. “In an interest rate swap, the first payment is known with certainty and will be made at month 6. The determination dates for the floating rate will be at months 6, 12, and 18 and the corresponding payment dates will be at months 12, 18, and 24. These correspond to the three forward rate agreements.”
I’ve run into multiple questions of this type… If its on the test, is it 3 or 4?