+1 862 207 3288 Vanilla Swaps
Cleveland Insurance Company has just negotiated a three-year plain vanilla swap in which it will exchange fixed payments of 8 percent for floating payments of LIBOR plus 1 percent. The notional principal is $50 million. LIBOR is expected to be 7 percent, 9 percent, and 10 percent (respectively) at the end of each of the next three years.
a. Determine the net dollar amount to be received (or paid) by Cleveland each year.
b. Determine the dollar amount to be received (or paid) by the counterparty on this interest rate swap each year based on the assumed forecasts of LIBOR.
Vanilla Swaps
