Suppose a dealer quotes ‘All-in-cost' for a generic swap at 8% against six-month MIBOR flat. If the notional principal amount of swap is 10,00,000.…

CA Final · Advanced Financial Management · MTP · May 2024
Suppose a dealer quotes ‘All-in-cost' for a generic swap at 8% against six-month MIBOR flat. If the notional principal amount of swap is 10,00,000. (i) Calculate semi-annual fixed payment. (ii) Produce the first floating rate payment for (i) above if the six month period from the effective date of swap to the settlement date comprises 181 days and that the corresponding MIBOR was 6% on the effective date of swap. In (ii) above, if the settlement is on ‘Net' basis, how much the fixed rate payer would pay to the floating rate payer? Generic swap is based on 30/360 days basis.

Suggested Answer and Working Notes:

(i) Semi-annual fixed payment = (N) (AIC) (Period) Where N = Notional Principal amount = 10,00,000 AIC = All-in-cost = 8% = 0.08 = 10,00,000 × 0.08 × (180 / 360) = 10,00,000 × 0.08 (0.50) = 10,00,000 × 0.04 = 40,000/- (ii) Floating Rate Payment = N (MIBOR) (dt / 360) = 10,00,000 × 0.06 × (181 / 360) = 10,00,000 × 0.06 (0.503) or 10,00,000 × 0.06 (0.502777) = 30,180 or 30,167 (iii) Net Amount = (i) – (ii) = 40,000 - 30,180 = 9820 or = 40,000 - 30,167 = 9,833

Topics: Interest Rate Risk Management

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic