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Hi sir, In part (b) in the answer key they have written value of swap will increase if interest rates increase more than expected. The value of the swap will also increase as the swap approaches maturity with fewer receipts and payments left. I dont quite understand what this means could you please explain?
Also, I have a generic doubt. For the exercise price, we choose the one that is closest to the spot rate right? why is it in the answer key that they show the calculations relating to whichever exercise prices are there
The swap will mean that they will be paying fixed interest instead of floating interest.
The more interest rates increase then the great the benefit of paying only fixed interest.
Pault does not have any options. However in general we do not simply choose the exercise price closest to the spot. Different exercise prices give different caps (or floors) but have different costs, so you cannot usually advise which is the best. In the exam you are expected to show the outcome for each of the exercise prices (unless, obviously) the question specifically says to do different.
Also sir, just a generic doubt- as an alternative to ticks we do buy-sell/400 if its not a 3 month future how do we calculate the denominator
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