PPT Slide

Value of swap at t = 0 is

where fixed payment = 6%.

Using the term structure given previously, with notational principal of

$100 million, we have

vS(0) = {[0.06(0.9486) - (1 - 0.9486)] (1 - 0.01)

+ [0.06(0.8953) - (0.9486 - 0.8953)]

+ [1 - 0.03)(1 - 0.01)]} ? 100 million

= 55,160(1 - 0.01) + 4,180(1 - 0.03)(1 - 0.01) = 58,622.

If credit risk is ignored, then the value of swap becomes 59,340.