Suppose that OIS rates of all maturities are 6% per annum, continuously compounded. The one-year LIBOR rate is 6.4%, annually compounded and the two-year swap rate for a swap where payments are exchanged annually is 6.8%, annually compounded
Which of the following is closest to the LIBOR forward rate for the second year when LIBOR discounting is used and the rate is expressed with annual compounding
A. 7.199%
B. 7.221%
C. 7.229%
D. 7.225%
C
When LIBOR discounting is used, the OIS rates are irrelevant. The two year LIBOR/swap zero rate, R, is given by
so that R=6.8137%. We can calculate the forward rate from the one- and two-year zero rates as 1.0681372/1.064−1 or 7.229%
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