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CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

Meridian Textiles has entered a plain vanilla interest rate swap on a notional principal of ₹50 crore. It pays a fixed rate of 8% p.a. and receives a floating rate of MIBOR + 0.5% p.a. Settlement is half-yearly. For the current half-year the reset MIBOR is 7.2% p.a. What is the net settlement for this period?

Meridian pays a net ₹7.5 lakh. It receives MIBOR plus 0.5%, which is 7.7%, and pays 8% fixed, a shortfall of 0.3% a year. On ₹50 crore for half a year this is ₹7.5 lakh, payable by Meridian.

  1. AMeridian pays a net ₹7.5 lakhCorrect
  2. BMeridian receives a net ₹7.5 lakh
  3. CMeridian pays a net ₹15 lakh
  4. DMeridian pays a net ₹20 lakh

Explanation

Floating rate received = 7.2% + 0.5% = 7.7%. Fixed rate paid = 8%, so the net rate is 0.3% p.a. against Meridian. Half-year net amount = 50 crore × 0.3% × 6/12 = ₹7.5 lakh payable. Using the full year gives ₹15 lakh, and ignoring the 0.5% spread gives ₹20 lakh.

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