CMA Final · Strategic Financial Management · Swaps
A 2-year annual-pay swap has notional Rs 10 crore. Zero-coupon discount factors are 0.9524 for year 1 and 0.9070 for year 2. What is the fair fixed swap rate, to two decimals?
The fair swap rate is 5.00%. It equals one minus the final discount factor, divided by the sum of the discount factors, here 0.0930 divided by 1.8594. At this rate the present value of fixed payments equals that of the floating leg.
- A5.00%
- B5.13%Correct
- C4.88%
- D5.26%
Explanation
Fair fixed rate = (1 - DF2) / (DF1 + DF2) = (1 - 0.9070)/(0.9524 + 0.9070) = 0.0930/1.8594 = 5.00%. Checking: 0.0930/1.8594 = 0.05002, so 5.00%. Option 5.13% wrongly uses a different base.
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