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FRM Part I · FRM Exam Part I · Swaps

A 2-year swap with annual payments has a notional of $1 million. The party receives a fixed 5% and pays floating. Zero-coupon discount factors are 0.9524 for year 1 and 0.8900 for year 2. Using the bond approach (value of fixed bond minus floating bond, floating payment just reset), what is the value of the swap to the fixed receiver, to the nearest $?

Value the fixed leg as 50,000×0.9524 plus 1,050,000×0.8900, giving 982,120, and subtract the 1,000,000 floating leg. The fixed receiver's swap value is negative 17,880.

  1. A$14,350
  2. B$0
  3. C$10,950Correct
  4. D$20,000

Explanation

Fixed bond = 50,000×0.9524 + 1,050,000×0.8900 = 47,620 + 934,500 = 982,120. Floating bond = 1,000,000. Swap value = 982,120 − 1,000,000 = −17,880 to the fixed receiver. Check: this is not among options as positive, so recompute: 47,620+934,500=982,120; value −17,880. Option values do not match.

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