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CMA Final · Strategic Financial Management · Interest Rate Derivatives

Kaveri Industries has entered a plain-vanilla interest rate swap on a notional of ₹50 crore, paying a fixed 9% p.a. and receiving floating MIBOR-linked rate, with semi-annual settlement. For the current half-year the floating rate is fixed at 8.2% p.a. What is the net settlement for the half-year?

Kaveri pays a net ₹20,00,000. Fixed payment exceeds the floating receipt by 0.8% per annum, and on ₹50 crore for a half-year this equals ₹20 lakh. Only the net difference is exchanged, and the period factor must be one-half.

  1. AKaveri pays ₹40,00,000
  2. BKaveri receives ₹20,00,000
  3. CKaveri pays ₹20,00,000Correct
  4. DKaveri pays ₹4,10,00,000

Explanation

Kaveri pays fixed 9% and receives floating 8.2%, so it is a net payer on the 0.8% difference. For six months: 50 crore × 0.8% × 6/12 = ₹20,00,000. Using a full year would give ₹40,00,000, which ignores the semi-annual period.

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