Suppose that the LIBOR zero rate is flat at 5% with annual compounding. In a five-year swap, company X pays a fixed rate of 6% and receives LIBOR annually on a principal of $100 million. The volatility of the two-year swap rate in three years is 20%.
a. What is the value of the swap?
b. Use DerivaGem to calculate the value of the swap if company X has the option to cancel after three years.
c. Use DerivaGem to calculate the value of the swap if the counterpany has the option to cancel after three years.
d. What is the value of the swap if either side can cancel at the end of three years?