Financial Risk Manager Part 2
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A firm has entered into a USD 20 million total return swap on the NASDAQ 100 index as the index payer with ABC Corporation, which will pay 1-year LIBOR + 2.5%. The contract will last 1 year, and cash flows will be exchanged annually. Suppose the NASDAQ 100 Index is currently at 2,900 and LIBOR is 1.25%. The firm conducts a stress test on this total return swap using the following scenario:
NASDAQ 100 in 1 year: 3,625
LIBOR in 1 year: 0.50%
For this scenario, what is the firm's net cash flow in year 1?
A
A net cash outflow of USD 4.40 million.
B
A net cash outflow of USD 4.25 million.
C
A new cash inflow of USD 4.25 million.
D
A new cash inflow of USD 4.40 million.