1. Interest Rate Swap (IRS ... - Finance Trainer

Bank A has entered into a fixed rate receiver swap with Bank B, for
EUR 100 m for 5 years. It receives 4,75% p.a. against 6-months
EURIBOR. After3 years Bank A wants to close the position and
receives the following EUR IRS quotation from Bank C: 2-years IRS
against 6-months EURIBOR 4.31 – 4.35%. The zero rates for 1 year
are 4.50% and for 2 years 4.55%.
What is the MtM-value of the swap position
The position of Bank A looks as follows:
4.35%
4.75%
BANK C BANK A BANK B
6m EURIBOR
6m EURIBOR
Bank A closes the original swap deal by buying the 2-years IRS from
Bank C (= fixed rate payer swap). It pays 4.35% and receives 6-
months EURIBOR. As the variable interest payments run through,
only the 2 fixed rate payments have to be considered for the
calculation of the MtM value.
Calculation of the result:
Year
Original
Opposite
Result
Discount
Present
swap deal
deal
(1/(1+r) n )
Value
1 +4,750,000 -4,350,000 +400,000 0.9569378 +382,775
2 +4,750,000 -4,350,000 +400,000 0.9148543 +365,942
Total +748,717
The actual value of the 5-years EUR IRS is EUR 748,717 (= Mark to Market result).
© FINANCE TRAINER International Interest Rate Swap (IRS) / Page 23 of 31