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Hi John
1)What have they done in part (b) swap demonstration. where did the yield interest of 3% and 4% (in the answer) come from. And what exactly are they trying to show?
2) In part c benefits of hedging with caps and collars. they have said that interest rate cap is a series of call options on a notional amount of principal? Isn’t interest rate cap the borrower buying a put option?
1. The question specifically asks you to demonstrate that the interest payment liability does not change whether the interest rates increase of decrease. So the answer has illustrated that by choosing one interest rate higher and one lower – you could obviously have chosen different rates instead. It is showing exactly what the question required – that the payment liability stayed the same.
Have you watched my free lectures on swaps??
2. The actual exam question and answer (which is what I am looking at) makes no mention of caps and collars.
yes, i did watch them. But I am finding both Pault and Sembilan to be quite confusing. Is there a lecture on them too?
Oh. I guess the kit has added on the requirement. But can you tell me whether or not a cap is a series of call options. As per my knowledge, it is a put option used by the borrower to fix the maximum cost they will have to pay on their borrowing.
Thanks
No – there are no lectures on these questions.
The following post may answer your question:
https://opentuition.com/topic/swap-4/You are correct – to create an interest rate cap, a borrower will buy a put option.
i read the answer to the question.
Is a swap then like an FRA.Where company pays the interest it is supposed to pay? Say for sembilan it will pay
yield +0.6% anyway.On the other hand separately, it enters into a swap arrangement with another party. It pays the party a fixed rate & receives a floating rate on which it makes a gain. this gain % is then deducted from the original % of the borrowing?
Is that correct, or have i gotten it wrong?
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