Finance Case Study
ph95
Swapsproject2020.docxFIN-465
Individual project - SWAPS
PLEASE SUBMIT AN ELECTRONIC (you can also upload excel files to support with your work).
Remember that NO collaboration is allowed with anyone. If you have any doubts about the honor code that governs the completion of this assignment, please consult the course syllabus or ask me!
Case (100 points) Has Libor lost its stature in derivatives markets?
1. (30 points) What is the difference between LIBOR and OIS as benchmarks in valuing interest-rate swaps? Is LIBOR a risk-free rate? How was LIBOR manipulated? (MAXIMUM 250 words)
2. (40 points) Value the interest rate swap (with a notional amount of $100m) by relying on the data provided at the end of the case study. The swap still has 9 months until maturity, and interest rate settlements are quarterly. The fund is receiving 2% in return for paying the 3-month LIBOR. All rates are quoted with compounding frequency that corresponds to the term.
Your analysis has to be done in 3 steps:
a. Compare LIBOR rates to OIS rates at similar maturities
· To compute the 9-month LIBOR rate use a simple linear interpolation (here’s an example https://ncalculators.com/geometry/linear-interpolation-calculator.htm
b. Compute the 3-month forward LIBOR rates on July 5, 2016 and on October 5, 2016 (read carefully the explanations under Exhibit 4)
c. Value the swap. Which one has a higher value?
3. (30 points) Does the valuation of an interest-rate swap in particular, and derivatives in general, depend on who the counterparty is and whether the contract is collateralized? (MAXIMUM 250 words)
