CMA Final · Strategic Financial Management · Swaps
Kaveri Ltd entered into a 3-year swap as fixed payer at 8% on notional Rs 10 crore, annual settlement. After one year, two years remain. The current 2-year swap rate is 7% and discount factors are 0.9346 for year 1 and 0.8734 for year 2 (both from today). Ignoring the payment due now, what is the approximate value of the swap to Kaveri Ltd?
The swap is worth about minus Rs 18.08 lakh to Kaveri Ltd. It pays 8% against a current market rate of 7%, a Rs 10 lakh yearly excess, and the present value of two such payments is Rs 18.08 lakh.
- ARs -18.08 lakhCorrect
- BRs +18.08 lakh
- CRs -9.04 lakh
- DRs -36.16 lakh
Explanation
Remaining fixed payment exceeds the market fixed rate by 1%, so annual net outflow = 1% of Rs 10 crore = Rs 10 lakh. PV = 10 x (0.9346 + 0.8734) = 10 x 1.808 = Rs 18.08 lakh. Kaveri pays above market, so the value is negative. A positive sign would be the sign mistake.
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