Interest rate swaps In September 2020, swap dealers were quoting a rate for five-year euro interest-rate swaps of 4.5% against Euribor (the short-term interest rate for euro loans). Euribor at the time was 4.1%. Suppose that A arranges with a dealer to swap a €10 million five-year fixed-rate loan for an equivalent floating-rate loan in euros.
a. Assume the swap is fairly priced. What is the value of this swap at the time that it is entered into?
b. Suppose that immediately after A has entered into the swap, the long-term interest rate rises by 1%. Who gains and who loses?
c. What is now the value of the swap for each €1,000 of notional value?