FRM Part I · FRM Exam Part I · Introduction to Derivatives
A company enters a one-year interest rate swap with quarterly settlement, paying a fixed rate of 6.00% per annum and receiving the 3-month reference rate, on a notional of USD 20 million. At the start of a quarter the reference rate is set at 5.20% per annum. Using simple quarterly accrual (annual rate divided by 4), what is the net payment for that quarter at settlement?
The company pays a net USD 40,000. It owes fixed interest of USD 300,000 (6% over a quarter on USD 20 million) and receives floating interest of USD 260,000 (5.2% over a quarter), so the difference of USD 40,000 flows out.
- ACompany pays USD 40,000Correct
- BCompany receives USD 40,000
- CCompany pays USD 160,000
- DCompany pays USD 80,000
Explanation
Fixed payment = 20m × 6%/4 = 300,000. Floating receipt = 20m × 5.2%/4 = 260,000. Net = 40,000 paid by the company. Paying 160,000 results from not dividing the rate difference by 4 (0.8% × 20m = 160,000 is annual).
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