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CFA Level I · CFA Level I Exam · Pricing and Valuation of Interest Rate and Other Swaps

An investor entered a pay-fixed, receive-floating swap with a notional of 10,000,000 and annual payments at a fixed rate of 3.00%. Two years remain, and the current par swap rate for a 2-year swap is 3.50%. The discount factors are 0.9709 for Year 1 and 0.9426 for Year 2. The value of the swap to the pay-fixed party is closest to:

The swap is worth about 95,700 to the pay-fixed party. The market rate exceeds the contract rate by 0.50%, which is 50,000 a year on the notional. The two annual differences are discounted using the sum of the discount factors, 1.9135.

  1. A50,000
  2. B95,700Correct
  3. C100,000

Explanation

The pay-fixed party gains because the market fixed rate has risen above the contract rate. Value = (3.50% − 3.00%) × 10,000,000 × (0.9709 + 0.9426) = 50,000 × 1.9135 = 95,675, which is about 95,700. Using one year of undiscounted difference gives 50,000, and summing two undiscounted years gives 100,000.

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