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In the qs it says:
As part of your investigation you note that 10 yr swap rates are quoted at 5.25-5.40.
Sir what is the relevance of this info?And part b) asks for the 6 mthly interest rate and effective annual int payable in a vanilla swap is agreed.c) the value at risk
They have taken some weird figures which i dont find from the qs.Can u pls guide me what figures they have used as 1.645 and how they have dealt with part b)
Thanks in advance
The 5.40% is relevant for part (b) of the question.
At the moment they are paying Libor/2 + 0.6% each half year (half the yearly figures)
If they swap then they will be paying 5.4%/2 each half year instead of Libor.
So the net result it 3.3% every half year (as per the arithmetic in the answer).
The 1.645 comes from using the normal distribution tables given in the exam.
Working backwards to see what number of standard deviations give an answer of 0.500 (i.e. 5%) it comes to somewhere between 1.64 and 1.65. 1.645 is an approximation to somewhere in between the two.
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