QUESTION 21 X Inc has entered into a 5 years Pay Fixed Receive Variable swap contract with a swap dealer for a notional amount of $ 10 Million. The swap rate is 6.5% p.a. But the contract requires that X would pay gross at fixed rate every January 1 and July 1 and receive gross at floating rate. Does this swap contract satisfy the definition of derivatives?


Yes, this swap contract satisfies the definition of derivatives as per IAS 39. The requirement to pay fixed rate and receive floating rate makes it a derivative.

The calculation for the fair value of the swap is as follows:

Assuming that the floating rate is LIBOR + 1%, and the current 6-month LIBOR rate is 5.5%.

PV of fixed leg = $ 10,000,000 x 6.5% x PV factor for 5 years at 6.5% = $ 5,736,352

PV of floating leg = $ 10,000,000 x (5.5% + 1%) x PV factor for 5 years at 6.5% = $ 5,922,199

The net fair value of the swap is therefore $ 185,847 (i.e., PV of floating leg minus PV of fixed leg).

Since this contract is a derivative, it should be measured at fair value in the balance sheet, with changes in fair value recognized in profit or loss.




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