CMA Final · Strategic Financial Management · Interest Rate Derivatives
A bank has a Rs 100 crore floating-rate liability and wants to pay fixed. It enters a 1-year plain-vanilla swap on a notional of Rs 100 crore, paying a fixed rate of 7.5% and receiving MIBOR, with annual settlement. MIBOR at reset is 8.25%. What is the net settlement for the bank at the end of the year?
The bank receives a net Rs 75 lakh. It receives floating at 8.25% and pays fixed at 7.5% on Rs 100 crore, so the 0.75% positive spread gives Rs 0.75 crore. Only the difference is exchanged, not the notional.
- APays Rs 75 lakh net
- BReceives Rs 75 lakh netCorrect
- CReceives Rs 7.5 crore net
- DReceives Rs 8.25 crore net
Explanation
Bank receives floating 8.25% and pays fixed 7.5%. Net = 0.75% x Rs 100 crore = Rs 0.75 crore = Rs 75 lakh received. Option A reverses direction.
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