Compute the initial value of a forward-starting swap that begins
question 1a: Compute the initial value of a forward-starting swap that begins at t=1, with maturity t=10and a fixed rate of 4.5%. (The first payment then takes place at t=2 and the final payment takes place at t=11 as we are assuming, as usual, that payments take place in arrears.) You should assume a swap notional of 1 million and assume that you receive floating and pay fixed.)question 1b: Compute the initial price of a swaption that matures at time t=5 and has a strike of 0. The underlying swap is the same swap as described in the previous questionwith a notional of 1 million. To be clear, you should assume that if the swaption is exercised at t=5 then the owner of the swaption will receive all cash-flows from the underlying swap from times t=6 to t=11 inclusive. (The swaption strike of 0 should also not be confused with the fixed rate of 4.5% on the underlying swap.)The attachment (on the swap+swaptions page) is my work for the questions. The model should be half correct. I think the problem of my model is that it cannot handle “The first payment then takes place at t=2 ” Something has to be changed on my model but I don’t know how.Can someone help me fix the model? thanks a lot !
