Answer: b) negative (-) $1.49 million

To value the swap from the perspective of the counterparty **paying fixed**, compute: \[ \text{Swap value} = PV(\text{floating leg}) - PV(\text{fixed leg}) \] ### 1) Discount factors With a flat continuously compounded curve at 1.0%: - \(P(0,0.25)=e^{-0.01\times 0.25}\approx 0.997503\) - \(P(0,0.75)=e^{-0.01\times 0.75}\approx 0.992528\) ### 2) Fixed leg The fixed rate is 3.0% per annum, semiannual, so each 6-month coupon is: \[ 100,000,000 \times 0.03 \times 0.5 = 1.5\text{ million} \] Thus: \[ PV_{fixed} = 1.5(0.997503) + 101.5(0.992528) \approx 102.243\text{ million} \] ### 3) Floating leg The floating coupon already set 3 months ago at 2.0% implies the next coupon is: \[ 100,000,000 \times 0.02 \times 0.5 = 1.0\text{ million} \] The final floating coupon is based on the current forward rate, which is 1.0%: \[ 100,000,000 \times 0.01 \times 0.5 = 0.5\text{ million} \] So: \[ PV_{float} = 1.0(0.997503) + 100.5(0.992528) \approx 100.748\text{ million} \] ### 4) Swap value to payer fixed \[ V = 100.748 - 102.243 \approx -1.49\text{ million} \] So the swap is a liability to the fixed-rate payer.

Author: Manit Arora