CMA Final · Strategic Financial Management · Swaps
Kiran Pharma has a Rs 100 crore notional fixed-for-floating swap, paying fixed 8% and receiving MIBOR, with 2 years left and annual settlement. The current par 2-year swap rate is 7%, and the 2-year annuity factor (sum of discount factors) is 1.80. What is the approximate mark-to-market value of the swap to Kiran?
The swap is a liability of about Rs 1.80 crore to Kiran. It pays 8% against a current market rate of 7%, an excess of Rs 1 crore per year on Rs 100 crore, and discounting this with the annuity factor of 1.80 gives Rs 1.80 crore.
- ALiability of Rs 1.80 croreCorrect
- BAsset of Rs 1.80 crore
- CLiability of Rs 1.00 crore
- DAsset of Rs 1.00 crore
Explanation
Kiran pays 8% when the market rate is 7%, so it pays 1% more than par. Annual excess = 100 crore x 1% = Rs 1 crore. PV = 1 x 1.80 = Rs 1.80 crore. Since Kiran pays above market, the value is a liability, not an asset.
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