OIS rates are 3.4% for all maturities. What is the value of an OIS swap with two years to maturity where 3% is received and the floating reference rate is paid. Assume annual compounding, annual payments, and $100 million principal.
OIS rates are 3.4% for all maturities. What is the value of an OIS swap with two years to maturity where 3% is received and the floating reference rate is paid. Assume annual compounding, annual payments, and $100 million principal.
To calculate the value of an OIS swap, we need to calculate the present value of the fixed and floating legs of the swap.
Fixed leg: The fixed leg of the swap is the amount received at a fixed rate of 3%. To calculate the present value of the fixed leg, we use the following formula:
Fixed Leg PV = Fixed Rate x Principal x PV Factor
where PV Factor is the present value factor of a fixed-rate bond with the same maturity as the swap. Since the swap has a two-year maturity and an annual compounding frequency, we can calculate the PV Factor using the following formula:
PV Factor = 1 / (1 + Fixed Rate)^n
where n is the number of periods, which is equal to the number of years multiplied by the compounding frequency. In this case, n = 2.
Therefore, the PV Factor is:
PV Factor = 1 / (1 + 0.03)^2 = 0.9414
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