Q1.Veezee (VZ) issues a 2-year floating rate bond in the amount of $100M on whichit pays (LIBOR6 â 0.5%) semi-annually. LIBOR6 refers to 6-month maturityLondon Interbank Offer Rate (LIBOR). First payment will be due on December31, 2010. However, VZ would prefer a fixed rate payment. With this objective, itenters into a swap with Citibank as the intermediary swap bank. VZ agrees topay Citibank an annual rate of 8% and in return will receive LIBOR from Citibank.All payments are made on a semi-annual basis.A. In the above swap arrangement, what is the net fixed rate that VZ has to pay? (5Points)B. Suppose the LIBOR6 is realized at the end of 6-month periods as follows:Dec 31,10LIBOR6Jun 30,11Dec 31,11Jun 30,12Dec 31,127%6%8%9%5%What will be the net interest payment of VZ for the principal of 100M on each ofthe dates shown in the above table? Of this amount, how much goes to Citibank?And how much to VZâs bondholders as interest payment? Show your results byfilling out the following table (send the completed table as a part of youranswers): (10 Points)LIBOR6Dec 31,107%June30,116%Dec 31,118%June30,129%Dec 31,125%Net pay toCitibankPay to Bond holdersNet pay by VZPage 3 of 3Q 2.A US investorâs equally-weighted portfolio contains Intel (US stock) and Nestle(Swiss stock) with the following risk-return characteristics (10 Points):IntelNestleExp. ReturnStand. Dev.5% (in $-terms)30% (in $-terms)12% (in SF- terms) 19% (in SF-terms)The dollar-denominated returns on the two stocks are correlated with a factor of0.20. Swiss Franc is expected to depreciate against dollar by 4%. The standarddeviation of the rate of change of $/SF spot exchange rate is 15%. In addition, theestimated correlation between SF-return on Nestle and the rate of change inexchange rate is 0.17.A. What is the dollar return on the investorâs portfolio? (4 Points)B. What is the standard deviation of the dollar return on the portfolio? (6 points)
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