2 (10%) Consider a bank that wants to hedge against an increase in interest rate...
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2 (10%) Consider a bank that wants to hedge against an increase in interest rate with either an interest rate cap or an interest rate swap. The term is three years. The fixed swap rate is 5.5%, and the cap rate is 5%. The notional value for both the cap and the swap is USD 100MM (Million Dollors), and both the cap and the swap uses the 6-month USD LIBOR rate as the index rate or the floating rate. Fill the following table with the net cash inflow from the cap contract and the swap contract Time (years) 6-Month Libor Cap Net Cash Flows Swap Net Cash Flows 0.2MM 5.1% 5,8% 6.1% 5 % 47% 0.5 0.05MM 1.5 2.0 2.5
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