CMA Final · Strategic Financial Management · Swaps
Reliance Foods has a Rs 100 crore 3-year swap paying fixed and receiving floating annually. The fixed rate is 7.0%. Floating reset rates for years 1, 2 and 3 turn out to be 6.0%, 7.5% and 8.5% (set at the start of each year and paid at the year-end). Net cash flows are settled on notional. What is the total net amount received (+) or paid (-) over the three years, ignoring discounting?
The company receives a net Rs 1.0 crore. Net flows are -1.0 crore, +0.5 crore and +1.5 crore across the years, because it receives floating and pays 7% fixed on Rs 100 crore, and these sum to +Rs 1.0 crore.
- A+Rs 1.0 croreCorrect
- B-Rs 1.0 crore
- C+Rs 2.0 crore
- D+Rs 0.5 crore
Explanation
Year 1: 6.0-7.0 = -1.0% = -Rs 1.0 cr. Year 2: 7.5-7.0 = +0.5% = +Rs 0.5 cr. Year 3: 8.5-7.0 = +1.5% = +Rs 1.5 cr. Total = -1.0+0.5+1.5 = +Rs 1.0 crore. The -1.0 option reverses the direction.
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