B Bank Ltd. has entered into a plain vanilla swap through on Overnight Index Swap (OIS) on a principal of 10 crore and agreed to receive MIBOR…

CA Final · Advanced Financial Management · RTP · November 2024
B Bank Ltd. has entered into a plain vanilla swap through on Overnight Index Swap (OIS) on a principal of 10 crore and agreed to receive MIBOR overnight floating rate for a fixed payment on the principal. The swap was entered into on Monday, 10 th July 2017 and was to commence on and from 11 th July 2017 and run for a period of 7 days. Respective MIBOR rates for Tuesday to Monday were: 8.75%, 9.15%, 9.12%, 8.95%, 8.98% and 9.15%. If B Bank Ltd. received - 4,170 net on settlement, calculate fixed rate and interest under both legs. Notes: (i) Sunday is a holiday (ii) Work in rounded rupees and avoid decimal working (iii) Consider 365 days in a year.

Suggested Answer and Working Notes:

Day Principal (₹) MIBOR (%) Interest (₹) Tuesday 10,00,00,000 8.75 23,973 Wednesday 10,00,23,973 9.15 25,075 Thursday 10,00,49,048 9.12 24,999 Friday 10,00,74,047 8.95 24,539 Saturday & Sunday (*) 10,00,98,586 8.98 49,254 Monday 10,01,47,840 9.15 25,106 Total Interest @ Floating 1,72,946 Less: Net Received 4,170 Expected Interest @ fixed 1,68,776 Thus, Fixed Rate of Interest 0.0880046 Approx. 8.80%** (*) i.e. interest for two days. (**) 10crore x 'X'/100 x 7/365 = 1,68,776 Hence, X = 1,68,776 x 365 x 100 / (1 cr. x 7) = 8.80%

Topics: Interest Rate Risk Management

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