A semi-annual pay interest rate swap where the fixed rate is 4.00% (with semi-annual compounding) has a remaining life of nine months. The six-month LIBOR rate observed three months ago was 3.85% with semi-annual compounding. Today’s LIBOR rates for 3-month and 9-month deposits are 4.2% and 4.8% (continuously compounded), respectively.
a) Calculate the forward LIBOR rate for the period between three and nine months assuming semi-annual compounding.
b) If the swap has a principal value of $15,000,000, what is the value of the 4% swap to the party receiving the fixed rate of interest?