(a) Explain why an Interest Rate Swap (assume LIBOR as the floating rate) with quarterly
settlement (assume 90 days per quarter) can be viewed as a strip of Eurodollar futures
contracts. (Note: A strip is a sequence of ED futures with successive expirations)
Maturity (years) Bid (%) Offer (%) Swap Rate (%)
2 5.03 5.06 5.045
4 5.35 5.39 5.370
7 5.65 5.68 5.665
10 5.83 5.87 5.850
(i) Suppose that Company X can invest for 4 years at 4.5%. Recommend a floating
rate, can it swap this fixed rate into?
(ii) Company Y can invest for 10 years at LIBOR minus 50 basis points.
Recommend a fixed rate, can it swap this floating rate into?
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