An Italian Corporation Enters into a Two-Year Interest Rate Swap

Essay

An Italian corporation enters into a two-year interest rate swap in euros on April 1, 2000. The swap is based on a principal of €100 million, and the corporation will receive 7% fixed and pay six-month Euribor. Swap payments are semiannual. The 7% fixed rate is quoted as an annual rate using the European method, so the implied semiannual coupon is 3.44% [since (1.0344)² = 1.07]. Two years later, the swap is finally settled, and the following Euribor rates have been observed:
$$\begin{array} { c c c c c } \text { Apr. 1, 2000 } & \text { Oct. 1, 2000 } & \text { Apr. 1, 2001 } & \text { Oct. 1, 2001 } & \text { Apr. 1, 2002 } \\\hline 6.5 \% & 7.5 \% & 8 \% & 7.5 \% & 6 \% \\\hline\end{array}$$ a. What have the swap payments or receipts for the corporation been on each swap payment date?
b. The same Italian corporation also entered another two-year interest rate swap in euros on April 1, 2000. The swap is based on a principal of €100 million, and the corporation contracted to receive 7% fixed and pay six-month Euribor. On this swap, the payments are annual. Hence, the two successive six-month Euribor are compounded. Assuming that the Euribor rates given in the previous problem have been observed, what have the two annual swap payments been?