- Determine the discount factors.
180 day: 1 / [1 + (0.052 × (180 / 360))] = 0.974659
360 day: 1 / [1 + (0.054 × (360 / 360))] = 0.948767
- Then, plug as follows:
(1 − 0.9487666) / (0.974659 + 0.9487667) = 0.026637
- The value of the payer swaption is the savings between the exercise rate and the market rate:
(0.026637 − 0.024) × (0.97465887 + 0.9487666) × 10,000,000 = $50,712.
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