The 4%-strike six-month Libor-based two-year cap and floor are trading at $2.30 and $2.55,respectively.Assume that the cap has 4 caplets maturing in 6 months,1 year,18 months,and 24 months,respectively,and that the floor similarly has 4 floorlets.What is the NPV at inception of a two-year swap in which you are paying Libor versus receiving 4%?
A) $- \$ 0.25$
B)$0
C)$0.25
D)There is not enough information to determine the price of the swap.

Question

Quizplus · Accepted Answer

The NPV of the swap can be approximated by the difference between the cap and the floor prices, which is $2.30 (cap) - $2.55 (floor) = -$0.25. This is because the swap effectively caps the interest rate you pay at 4% while also setting a floor on the rate you receive at 4%, mirroring the financial impact of buying a cap and selling a floor.

The 4%-Strike Six-Month Libor-Based Two-Year Cap and Floor Are Trading −$0.25- \$ 0.25−$0.25

The 4%-Strike Six-Month Libor-Based Two-Year Cap and Floor Are Trading $- \$ 0.25$