Question

Hay Co. enters intoa "receive fixed, pay variable" interest rate swap on July 1, 20x1 for a notional amount of $ 3,000,000. The set rate is 12% equal to the current rate of July 1, 20x1. Cash settlement is due on July 1, 20x3.Information on market rates follows:

July 1, 20x1.............12%
July 1, 20x2.............9%
July 1, 20x3.............13%

Requirements:
a) How much is the derivative asset ( liability) to be presented in Hay's june 30, 20x2 statement of financial position?
b) How much is gain (loss) recognized on settlement date?

Answer 1

In the above question,

Derivative asset:Derivatives are assets that derive value from an underlying instrument, such as a stock, bond or commodity. Hedge funds, sophisticated traders and commodity market participants use derivatives to assume or reduce risk.

Derivative Liability:when a rate is fixed and the fixed rate is above the actual rate then it becomes the liability for the company.

(A)Rate Fixed=12%

Actual in 20X1=12% So, their is no derivate asset or liability.

Actual in 20X2=9%.So, their is 3% benefit for the reciever. So, it will become a derivative asset.

Actual in 20X3=13%.So, their is 1% loss for the reciever.So, it will become a derivative liability.

(B)

On, the settlement date , their will be a 1% loss on the total of 30,00,000 which will be 30,000.