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FRM Part I · FRM Exam Part I · Swaps

A company enters a 3-year plain vanilla interest rate swap with annual payments, paying a fixed rate of 4.0% and receiving 12-month SOFR-based floating on a notional of USD 50 million. At the first payment date the floating rate set at the start of the period was 3.2%. What is the net payment made by the company at that date?

The company pays a net USD 400,000. It owes 4.0% fixed, or USD 2.0 million, and receives 3.2% floating, or USD 1.6 million, on USD 50 million. Only the difference is exchanged, and the fixed payer is out of pocket because fixed exceeds floating.

  1. AUSD 400,000 paid by the companyCorrect
  2. BUSD 400,000 received by the company
  3. CUSD 1,600,000 paid by the company
  4. DUSD 2,000,000 paid by the company

Explanation

Fixed leg = 4.0% x 50m = 2.0m paid. Floating leg = 3.2% x 50m = 1.6m received. Net = 0.4m paid by the company. Receiving 400,000 reverses the direction. 1.6m ignores netting the fixed leg.

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