You observe the following anticipated floating rate swap payments, each based on a notional $ 100 M. Assume semi-annual compounding.
Floating Payments
t=0 0.5 1 1.5
1 year swap 1M 1.1M
1.5 year swap 1M 1.1M 1.12M
Construct the implied term structure of LIBOR rates. What are the corresponding swap rates?
You plan to sign a 1.5 year Eurodollar loan today (t = 0) for $l,000,000 for 1% over LIBOR. What is the “no arbitrage” forecast of the interest payments you will make at the end of each 6 month period?
Rates may go up and your floating rate payments increase. Conceptually, how would you hedge this possibility?