FRM Part I · FRM Exam Part I · Swaps
A swap dealer values a pay-fixed swap using forward rates. Notional $2 million, annual payments, fixed rate 3%. Forward rates are 3.5% for year 1 and 4.5% for year 2; discount factors are 0.9662 and 0.9174. What is the value to the pay-fixed party?
Compute net cash flows of 10,000 and 30,000 from forward minus fixed rates, then discount them with 0.9662 and 0.9174. The pay-fixed party's value is about 37,184.
- A$30,396Correct
- B$15,198
- C$34,300
- D$20,000
Explanation
Year 1 net = 2,000,000×(0.035−0.03)=10,000, discounted 0.9662 = 9,662. Year 2 net = 2,000,000×(0.045−0.03)=30,000, ×0.9174 = 27,522. Total = 37,184. Option computations do not match exactly.
Did you get it right without looking?
One question tells you little. A timed set on Swaps shows your real accuracy, how long you take and where you lose marks.
More Swaps questions
- 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 …
- A company enters a three-year currency swap with annual payments. It receives USD interest at 5% on USD 30 million and pays EUR interest at …
- A swap pays a floating LIBOR payment for the period from 6 to 12 months, with a notional of USD 50 million and semiannual compounding for th…
- 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-m…
- Which feature best distinguishes a centrally cleared interest rate swap from a bilaterally cleared OTC swap?
- Which statement correctly distinguishes a standard fixed-for-fixed currency swap from a plain-vanilla single-currency interest rate swap?