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CMA Final · Strategic Financial Management · Swaps

Sagar Textiles has a ₹60 crore loan at MIBOR plus 1%, reset every six months. The CFO expects MIBOR to rise steadily over the next three years and wants to stabilise interest cost without prepaying the loan. Which plain-vanilla interest rate swap position suits this aim?

The company should pay fixed and receive floating on the swap notional. The floating receipts from the swap offset the MIBOR-linked interest on its loan, so its net interest cost becomes effectively fixed and it is protected if MIBOR rises.

  1. APay floating and receive fixed on the same notional
  2. BPay fixed and receive floating on the same notionalCorrect
  3. CExchange the notional principal at inception and at maturity
  4. DPay floating to one party and receive floating from another on the same index

Explanation

The firm has floating-rate exposure and fears rising rates. By paying fixed and receiving floating, the floating receipts offset the MIBOR-linked interest on the loan, leaving a net fixed cost. Paying floating and receiving fixed would double the exposure to rising rates. A plain interest rate swap does not exchange principal, and a floating-for-floating swap on the same index does not remove the risk.

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