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

In a plain vanilla interest rate swap, the party that pays a fixed rate and receives a floating rate is most likely to:

The fixed-rate payer most likely benefits when the floating rate rises above the fixed rate, because it receives floating payments that grow while its own fixed payments stay constant. The notional is not exchanged, and falling rates favor the fixed-rate receiver.

  1. Abenefit when the floating reference rate rises above the fixed rateCorrect
  2. Bbenefit when market interest rates fall after the swap is initiated
  3. Cexchange the notional principal with the counterparty at maturity

Explanation

The fixed-rate payer receives floating, so a rise in the floating rate increases the payments it receives relative to what it pays. A fall in rates benefits the fixed-rate receiver. In a plain vanilla swap the notional principal is not exchanged.

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