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Suppose in an interest rate swap the notional principal is $10,000,000 with a swap period of 2 years. Two companies agree to exchange a fixed for a floating income stream. Barmko agrees to pay 7% to Darmko. Darmko agrees to pay Barmko LIBOR+ 4% 1a. Suppose at the end of the first year LIBOR is 8%, which party and how much will that party net? (SHOW CALCULATIONS HERE. USE NO TEXT) Barmko pays Darmko: (14) Darmko pays Barmko: (1%) Barmko nets from Darmko: (1) 1b. Suppose that the end of the second year LIBOR is 9%, which party and how much will that party net? (SHOW CALCULATIONS HERE. USE NO TEXT) Barmko pays Darmko: (1%) Darmko pays Barmko: (1 %) Barmko nets from Darmko: (1) Over the two years Barmko nets from Darmko: (1) 2. As a hedge, Darmko buys a two-year cap on a 6 month LIBOR of $10,000,000 with current LIBOR at 4%, suppose that in the first six months LIBOR rises to 5% second six months LIBOR rises to 6% third six months LIBOR rises to 7% fourth six months LIBOR rises to 9.5% What will be the overall cash position of Darmko, as a holder of both the interest rate swap above and the cap at 4%, at the end of two years? (Assume the cost of the cap is $500,000) (SHOW CALCULATIONS HERE. USE NO TEXT) 1st six months: (1) 2nd six months: (1 x) 3rd six months: (1 x) 4th six months: (1 x) Sum (over two year period) After hedge of the i-rate swap with the cap, the net position of Darmko _(2)

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