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FRM Part I · FRM Exam Part I · Swaps

A corporate treasurer enters a 3-year plain vanilla interest rate swap with annual payments, paying a fixed rate of 4.00% and receiving 12-month SOFR-based floating on a notional of USD 50 million. The floating rate set at the start of the year turns out to be 4.60%. Assuming payments are netted and settled at the end of the year, what is the net cash flow to the treasurer for that year?

The treasurer receives USD 300,000 net. Floating received at 4.60% exceeds fixed paid at 4.00%, and the 0.60% difference applied to the USD 50 million notional gives USD 300,000. Only the net difference is exchanged, not the gross interest amounts.

  1. AReceives USD 300,000Correct
  2. BPays USD 300,000
  3. CReceives USD 2,300,000
  4. DPays USD 2,000,000

Explanation

The treasurer receives floating at 4.60% and pays fixed at 4.00%. Net = (4.60% - 4.00%) x 50,000,000 = 0.60% x 50,000,000 = USD 300,000 received. Paying the net is the sign error; the other options show gross flows rather than the net amount.

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