Suppose that the LIBOR zero rate is flat at 5% with annual compounding. In a 5-year swap, company X pays a fixed rate of 6% and receives LIBOR. The volatility of the 2-year swap rate in 3 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 3 years.
(c) Use DerivaGem to calculate the value of the swap if the counterparty has the option to cancel after 3 years.
(d) What is the value of the swap if either side can cancel at the end of 3 years?