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John ques. June 2012 (Sembilan co)
My queries for following requirements
a) Why Forward rates has been used rather then yield curve rates as in the technical articles yield curve rates has been use for the received from the bank.
why the nank fee of 20basis point has not been included in the calculations of received amount?Is it because we assuming swap is not agreed yet and again in the Technical article Forward rates and swap valuation bank fee has been deducted from the recieved interest rates.
for
B) i)The answers has not specifically says whether the interest rates increases or decreases.It just shows calculations in two different circumstances when interest rate is 3% and 5%.But its going to be fixed anyways after swap.Dont know why they demonstrating this.Or i did not understand the requirement at the first place.My understanding is examiner wants to know whether the Interest rate for semblian co increase or decreases after swaping their floating rates to fixed rates.Your feedback on this would be highly appreciated.
Thank you.A) When the question says the swap is based on the current yield curve rate, it means whatever the current rate happens to be each year (it could have been worded a bit better!!). Therefore the forward rates have been used as the estimates (it asks what they expect to pay or receive).
Also the question specifically says to exclude the 20 basis points.B) You have not read the requirement properly. It specifically asks you to demonstrate that it does not change whether rates increase or decrease – so he is asking for a demonstration of both,
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