CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
In a plain vanilla interest rate swap, the party that pays a fixed rate and receives a floating rate is most likely:
The fixed-rate payer is hurt when the floating reference rate falls. It continues paying the fixed rate but receives smaller floating payments, so the swap loses value. Notional principal is only a reference amount for calculating payments and is not exchanged in a plain vanilla swap.
- Aexposed to loss if the floating reference rate falls after initiation.Correct
- Bexposed to loss if the floating reference rate rises after initiation.
- Crequired to exchange the notional principal at maturity.
Explanation
The fixed payer receives floating, so if floating rates fall, it receives less while still paying the fixed rate, and the swap loses value. In a plain vanilla swap the notional principal is not exchanged.
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