CMA Final · Strategic Financial Management · Swaps
A bank quotes a 3-year INR swap with annual settlement. Discount factors are Year 1: 0.9434, Year 2: 0.8900, Year 3: 0.8396. What is the par swap fixed rate (approximately)?
The par swap rate is about 6.00%. It equals one minus the final discount factor, 0.1604, divided by the sum of the three discount factors, 2.6730, which gives 6.00%.
- A6.00%Correct
- B6.50%
- C5.50%
- D6.25%
Explanation
Par swap rate = (1 - DF3) / sum of DFs. Numerator = 1 - 0.8396 = 0.1604. Sum of DFs = 0.9434 + 0.8900 + 0.8396 = 2.6730. Rate = 0.1604 / 2.6730 = 6.00%. Forgetting to divide by the annuity sum would give 16.04%.
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