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Sir,
Please help me out i m freakin out due to this question.In the question it is clearly stated that after swap S Co will receive based on current yield curve rate.
Why in examiner answer he is using forward rates.
Secondly I am totaly unable to understand the swap setup in answer by examiner as it is no where near to what i have learned from ur lecture. From where on earth examiner brings these approches which are almost impossible to understand.
Your help is eagerly needed please help me out to understand and solve this question it’s grinding me.
Kind RegardsThe spot rates given are the rates quoted now for borrowing of 1, 2, 3 or 4 years. If they swap then they will receive interest based on the current rates. Although the wording is maybe a bit unclear here, it means that they will receive interest based on whatever the rate happens to be for the year. The forward rates are the best estimates available.
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