FRM Part I · FRM Exam Part I · Swaps
A 2-year swap with annual payments and a notional of USD 100 million pays a fixed rate of 4% against floating, and a floating payment has just been reset. Discount factors are 0.9600 for year 1 and 0.9200 for year 2. What is the value of the swap to the fixed-rate receiver?
The swap is worth about -USD 0.48 million to the fixed receiver. The fixed leg, including notional, is worth 99.52 million, while the floating leg is worth par at 100 million after the reset. The fixed rate of 4% is below the par rate, so the receiver has a loss.
- A-USD 0.48 millionCorrect
- B+USD 0.48 million
- C+USD 7.52 million
- D-USD 7.52 million
Explanation
Fixed leg PV = 4 x (0.96 + 0.92) + 100 x 0.92 = 7.52 + 92 = 99.52. The floating leg is worth par, 100, just after reset. The receiver's value is 99.52 - 100 = -0.48 million. Omitting the principal gives the +7.52 distractor, which is wrong.
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