FRM Part I · FRM Exam Part I · Swaps
A dealer is the fixed-rate payer on a USD 40 million swap. After a rise in market swap rates, the swap's fixed rate remains the contractual rate. What is the effect on the dealer's swap value?
The fixed-rate payer's swap gains value when market swap rates rise, because it pays a below-market fixed rate. The fixed bond it is short loses value while the floating bond stays near par.
- AValue falls because the fixed payments become more costly
- BValue rises because the contract fixed rate is now below the market swap rateCorrect
- CValue is unchanged because the floating leg resets to par
- DValue is unchanged because notional is not exchanged
Explanation
When market swap rates rise, a fixed payer locked in the lower rate holds a swap worth more: the fixed bond it is short falls in value while the floating leg stays near par.
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