Question

A company `bought' a 10 year semi-annual IR swap at a rate of 5% on a notional of £100m. Five years later, the 5 year swap rate is 4%. Which option best describes their mark to market position?

a) they have unrealised loss of 10m

b) loss of 4.5m

c) profit of 4.5m

d) profit of 10m

Answer 1

Notional Principle = $10 million.

Actual 10 year Swap rate = 5%.

After five year, Swap rate reduce to 4%. But the borrower has to pay at 5% only because contact for 10 year is already Made. but Value of notional principle increase because of this decrease in Swap rate.

So, New value of Notional Principle is calculated in excel and screen shot provided below:

New Value of Notional Principle is $10.45 million.

So total profit = $10.45 million - $10 million

= $0.45 million.

Mar to market position is $0.45 million Profit.

Option (C) is correct answer.