Can we solve ques no 2 by the method shown in the last image?
If yes then answer is not matching with the given options.
If no then why we cannot use that method?
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What the question is trying to ask us is what is the current value in comparison if we would enter the swap today so if you look at that then we are given the equilibrium 2 year swap rate of 1%
So what we’ll do is – if we enter the swap today we would have to pay 1% but we entered the swap one year ago and we are paying a fixed rate of 3% so will calculate it by 3-1 multiplied by the notional principal and we will bring it to the present amount whatever it is with the help of the discount factors for year 1 and year 2.
From the perspective of bank the current value of the swab describe in exhibit two is negative because the equilibrium fixed rate has fallen For the similar two year swap.