2.875 would require a notional principal of JPY683 million (rounded to the nearest million yen) to
achieve his goals.
Kondo asks Watanabe whether it would be possible to cancel the swap prior to its maturity. Watanabe
responds with three statements:
Statement 1: During the life of the swap, you could enter into a new pay-floating swap with
the same terms as the original swap except it would have a maturity equal to
the remaining maturity of the original swap. However, the fixed rate you receive
might be lower than the fixed rate you’re paying on the original swap.
Statement 2: You could purchase a payer swaption with the same terms as the original swap.
This would protect you from falling fixed swap rates but at the cost of the
premium you would pay to the swaption counterparty.
Statement 3: If you purchase a swaption from the same counterparty as the original swap, it
is common to require the payments of the two swaps be netted or cash settled
if the swaption is exercised.
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