CMA Final · Strategic Financial Management · Swaps
Under a plain vanilla interest rate swap with a notional principal of Rs 20 crore, Firm A pays a fixed rate of 8% p.a. and receives 6-month MIBOR, settled half-yearly. For the first period MIBOR is 7% p.a. What is the net settlement for the half-year, and who pays it?
Firm A pays Rs 10 lakh. Fixed leg is 8% on Rs 20 crore for half a year, Rs 80 lakh, while the floating leg is 7%, Rs 70 lakh. Only the difference is exchanged, and since fixed exceeds floating, the fixed payer A pays the net amount.
- AA pays Rs 10 lakhCorrect
- BA receives Rs 10 lakh
- CA pays Rs 20 lakh
- DA receives Rs 20 lakh
Explanation
Fixed payment = 20 crore x 8% x 0.5 = Rs 80 lakh. Floating receipt = 20 crore x 7% x 0.5 = Rs 70 lakh. Net = Rs 10 lakh payable by A. Rs 20 lakh results from ignoring the half-year fraction in the rate difference (annual 1% x 20 crore).
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