The correct answer is A.

The CMT swap pays:
$7,000,000 \cdot \frac{Y_{CMT} - 7%}{2}$

After 6 months, assuming a 0.5% increment or decrement from the current 7% rate, the possible rates are 7.5% and 6.5%. The corresponding payoffs are:

• If the rate goes up to 7.5%: $7,000,000 \times \frac{7.5% - 7%}{2} = `$17`,500$
• If the rate goes down to 6.5%: $7,000,000 \times \frac{6.5% - 7%}{2} = -`$17`,500$

After 1 year, the rates can change by another 0.5%, resulting in possible rates of 8%, 7%, and 6%. The corresponding payoffs are:

• If the rate reaches 8%: $7,000,000 \times \frac{8% - 7%}{2} = `$35`,000$
• If the rate is 7%: $7,000,000 \times \frac{7% - 7%}{2} = `$0`$
• If the rate falls to 6%: $7,000,000 \times \frac{6% - 7%}{2} = -`$35`,000$