If a broker refers to "the payer of 5-year euro at 4.12", what is this party doing?
A) Paying a fixed rate of 4.12% per annum on a 30/360 basis over 5 years in euros through an interest rate swap in exchange for receiving a floating rate of 6-month Euribor on an actual/360 basis reset semi-annually and paid in arrears.
B) Paying a fixed rate of 4.12% per annum on an actual/actual basis over 5 years in euros through an interest rate swap in exchange for receiving a floating rate of 6-month Euribor on an actual/360 basis reset semi-annually and paid in arrears.
C) Paying a 5-year euro deposit and receiving a rate of interest of 4.12% on an actual/360 basis. Taking a 5-year euro deposit and paying a rate ol interest of 4.12% on an actual/360 basis.

Question

Quizplus · Accepted Answer

The use of the term "payer" implies that this party is paying a fixed rate, and the mention of an interest rate swap and a floating rate of 6-month Euribor suggests that this is an OTC derivative contract. The use of a 30/360 basis and actual/360 basis also suggests that this is an interest rate swap. Option B includes an actual/actual basis, which is less commonly used in interest rate swaps, and Option C refers to a euro deposit, which is a different financial instrument altogether.

If a Broker Refers to "The Payer of 5-Year Euro