Question

On January 15^th 2019 A and B agreed on a 1 year swap with quarterly settlement and the swap rate at 7% p.a. on notional principal of $1m. A is the payer. The floating rate was set at BBSW which was 8% p.a. on January 15, 8.5% in April, 7% in July, 6.5% in October and 5% in January 2020. Calculate the swap cash settlements between the two parties

Answer 1

Notional = $,000,000

Fixed rate = 7%

Floating rates

January 15th 2019 = 8%

April 2019 = 8.5%

July 2019 = 7%

October 2019 = 6.5%

January 2020 = 5%

Solution

A is the fixed rate payer & B is the fixed rate receiver

The floating rate is set at the beginning of the quarterly period.

For the April 2019 period

Floating Cash Flow = Notional * (Floating rate at beginning of period / 4) Since it is quarterly

Floating Cash Flow = $1,000,000 * (8% / 4)

Floating Cash Flow = $20,000

Fixed Cash Flow = Notional * (Fixed rate / 4)

Fixed Cash Flow = $1,000,000 * (7% / 4)

Fixed Cash Flow = $17,500

Net Cash Flow to A = Floating Cash Flow - Fixed Cash Flow

Net Cash Flow to A = $20,000 - $17,500

Net Cash Flow to A = $2,500

Net Cash Flow to B =  Fixed Cash Flow - Floating Cash Flow

Net Cash Flow to B = $17,500 - $20,000

Net Cash Flow to B = -$2,500

End of Period	Floating rate at beginning of period	Floating Cash Flow	Fixed Cash Flow	Net Cash Flow to A	Net Cash Flow to B
April 2019	8%	$20,000	$17,500	$2,500	-$2,500
July 2019	8.50%	$21,250	$17,500	$3,750	-$3,750
October 2019	7%	$17,500	$17,500	$0	$0
January 2020	6.50%	$16,250	$17,500	-$1,250	$1,250