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FRM Part I · FRM Exam Part I · Introduction to Derivatives

A company enters a 2-year pay-fixed swap with semiannual payments on a notional of USD 20 million. The fixed rate is 5% per annum. At the next settlement date, the floating rate set at the previous reset date was 4% per annum (semiannual compounding basis). What is the net payment made by the company on that date?

The company pays USD 100,000 net. It owes fixed interest of USD 500,000 (5% on USD 20 million for half a year) and receives floating interest of USD 400,000 (4% for half a year), so the net difference is USD 100,000 paid.

  1. AUSD 100,000 paidCorrect
  2. BUSD 100,000 received
  3. CUSD 200,000 paid
  4. DUSD 200,000 received

Explanation

Fixed payment = 20m × 5% × 0.5 = USD 500,000. Floating receipt = 20m × 4% × 0.5 = USD 400,000. Net = 500,000 − 400,000 = USD 100,000 paid by the company. Option C uses annual rather than semiannual accrual of the 1% difference, and B reverses the direction.

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