Suppose that zero rates are as in Problem. Use DerivaGem to determine the value of an option to pay a fixed rate of 6% and receive LIBOR on a 5-year swap starting in 1 year. Assume that the principal is $100 million, payments are exchanged semiannually, and the swap rate volatility is 21%.
Problem :
Suppose that the 1-year, 2-year, 3-year, 4-year, and 5-year zero rates are 6%, 6.4%, 6.7%, 6.9%, and 7%. The price of a 5-year semiannual cap with a principal of $100 at a cap rate of 8% is $3. Use DerivaGem to determine:
(a) The 5-year flat volatility for caps and floors.
(b) The floor rate in a zero-cost 5-year collar when the cap rate is 8%.