Financial Risk Manager Part 1
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On July 31, 2020, a trader from a large bank's interest rate desk initiated a customized 2-year interest rate swap deal with a notional value of USD 7.5 million. According to the terms of the swap, the bank received a fixed annual interest rate of 2.3%, while it was required to pay an annual rate determined by the SOFR on the first day of each payment month, plus an additional 1.95%. Payments were made semiannually. The table below displays the relevant SOFR rates for the 2-year period:
Date 6-month SOFR 1-Jul-20 0.11% 1-Jan-21 0.10% 1-Jul-21 0.05% 1-Jan-22 0.05% 1-Jul-22 1.52%
Assuming there were no defaults, what is the precise net amount the bank either paid or received on July 31, 2022?
On July 31, 2020, a trader from a large bank's interest rate desk initiated a customized 2-year interest rate swap deal with a notional value of USD 7.5 million. According to the terms of the swap, the bank received a fixed annual interest rate of 2.3%, while it was required to pay an annual rate determined by the SOFR on the first day of each payment month, plus an additional 1.95%. Payments were made semiannually. The table below displays the relevant SOFR rates for the 2-year period:
| Date | 6-month SOFR |
|---|---|
| 1-Jul-20 | 0.11% |
| 1-Jan-21 | 0.10% |
| 1-Jul-21 | 0.05% |
| 1-Jan-22 | 0.05% |
| 1-Jul-22 | 1.52% |
Assuming there were no defaults, what is the precise net amount the bank either paid or received on July 31, 2022?
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