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Assignment Part B | John Smith
Assignment Part B
EFB344 Risk Management and Derivatives
Due: 12/10/15
Semester 2 2015
Assignment Part B |
1 Task 1: Interest Rate Derivatives
For the completion of Task 1, Table 1, was provided detailing Maturity and Swap Zero Rate. All rates
in the table provided are quoted nominal annual with semi-annual compounding.
Maturity
6 Month
1 Year
2 Year
3 Year
4 Year
5 Year
Swap Zero Rate
2.210%
2.039%
2.040%
2.127%
2.380%
2.532%
Table 1 Swap Zero Rates
1.1 Task 1 a
Calculate the one-year forward rates out to year five.
Assumptions:
1. Only calculating one-year forward rates for values provided on table e.g. 1 year, 2 year etc.
As all Swap Zero Rates are given, Equation 1 Forward Rate Equation can be used.
=
− −1 −1
− −1
Equation 1 Forward Rate Equation
Where,
Rf = Forward Rate
R = Swap Zero Rate
T = Maturity
Using the forward rate between Year 1 and Year 2 as an example.
2 2 − 1 1
2 − 1
2.040 × 2 − 2.039 × 1
=
2−1
= 2.041%
2 =
Using Microsoft Excel to complete for all years.
Maturity
6 Month
1 Year
2 Year
3 Year
4 Year
5 Year
Swap Zero Rate
2.210%
2.039%
2.040%
2.127%
2.380%
2.532%
Forward Rate
1.868%
2.041%
2.301%
3.139%
3.140%
Table 2 Forward Rates
1
Assignment Part B |
1.2 Task 1 b
Find the Swap rate (rounded to 3 decimal places) for a 3 year fixed for floating swap.
Firstly using Equation 2 Linear Interpolation Equation to gain all mid-year points.
= −0.5 + ( +0.5 − −0.5 )
− −0.5
+0.5 − −0.5
Equation 2 Linear Interpolation Equation
Using year 1.5 as an example to get the Swap Zero Rate.
1.5 = 1 + (2 − 1 )
1.5 − 1
2 − 1
= 2.039 + (2.040 − 2.039)
1.5 − 1
2−1
= 2.040%
This value is the same as 2 year due to the closeness of values between 1 Year.
The table below shows completed Sway Zero Rate and Forward Rate for all whole and mid-year
points.
Calculating 6 month forward rate for...