FRM Part I · FRM Exam Part I · Swaps
Company A enters a 3-year plain vanilla interest rate swap with semiannual payments, paying a fixed rate of 4.00% and receiving 6-month SOFR-based floating on a notional of USD 50 million. At the first payment date, the floating rate set at the start of the period was 3.20% (annualized). What is the net cash flow for Company A on that date?
Company A pays a net USD 200,000. It pays fixed of USD 1,000,000 (4.00% x 0.5 x 50 million) and receives floating of USD 800,000 (3.20% x 0.5 x 50 million). Only the net difference is exchanged, and fixed exceeds floating.
- APays USD 200,000Correct
- BReceives USD 200,000
- CPays USD 400,000
- DReceives USD 400,000
Explanation
Fixed payment = 50m x 4.00% x 0.5 = USD 1,000,000. Floating receipt = 50m x 3.20% x 0.5 = USD 800,000. Net = pays USD 200,000. Receiving 200,000 reverses the direction; 400,000 uses annual rather than semiannual accrual.
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