Question

Alpha Corporation and Horizon Ltd have decided to go into a plain vanilla interest rate swap, Alpha pays a fixed interest rate of 6% pa while Horizon pays floating rate based on Libor rate. The notional amount is $10 Million. Based on the rates given calculate each payoff on semiannual basis lull '2001 | 54% 341201| 65% jan 12003 | I'Y% 3.4 , | 12%.

Answer 1

Notional principal

$ 10,000,000.00

Only the net interest amount is settled every period thus reducing the counterparty risk

Period	LIBOR rates	Fixed rate	Difference	Effective semi annual interest rate		Comments
1	5.20%	6.00%	0.80%	0.40%	0.00%	Starting of contract. No exchange
2	5.80%	6.00%	0.20%	0.10%	$ 10,000.00	Alpha pays Horizon
3	6.20%	6.00%	-0.20%	-0.10%	$(10,000.00)	Horizon pays Alpha
4	6.00%	6.00%	0.00%	0.00%	$                -	No exchange
6	6.40%	6.00%	-0.40%	-0.20%	$(20,000.00)	Horizon pays Alpha
7	6.20%	6.00%	-0.20%	-0.10%	$(10,000.00)	Horizon pays Alpha