Question

QUESTION # 2 Consider a 1-year swap initiated on January 10th, 2013, between Sony and Samsung, Under the terms of the swap contract Sony is agreed to pay Samsung an interest of 6% per annum on a notional principle of Max. Marks 2+1] $200 n Samsung agrees to pay a 3-month LIBOR rate on the same principal. In addition, the payments are exchanged every three months, andthe6%is quoted with quarterly compounding. Following Table shows the LIBOR Samsung (complete the Table please). Which payments are certain, and which are uncertain? rate for the coming two years. Calculate the quarterly net Interest payments for Samsung Cash flows in SMillion LIBOR (%) | Fixed CF Floating CF Net CF Dates 10-Jan-2013 10-Apr-2013 10-July-2013 10-Oct-2013 5.0 5.2 5.6 5.8 6.0 5-2 S. 6 S. 8 10-Jan-2014 ANSWER

Answer 1

A one year swap between Samsung and Sony is initiated in which Sony agreed to pay Samsung 6% pa quarterly compounding(quarterly interest rate = 6/4= 1.5 % ) interest on notional principal of $200 million and in return Samsung will pay 3 month LIBOR

Samsung Cashflow in $ million

Dates                     LIBOR%            Fixed CF                            Floating CF(pay)                              Net CF

10-jan-13                  5.0                        -----                                     --------

10-apr-13                  5.2                 200*1.5%=3                      200*(0.052*3/12)=(2.6)                          0.4

10-jul-13                  5.6                  203*1.5%=3.05                200*(0.056*3/12)=(2.8)                           0.25

10-oct-13                 5.8                  206.05*1.5%=3.09           200*(0.058*3/12)=(2.9)                          0.19

10-jan-13                  6.0                  209.14*1.5%=3.14           200*(0.06*3/12)=(3)                                0.14

Fixed payments are always certain therefore interest paid by Sony is certain.

Floating rate is uncertain because it fluctuates with LIBOR.