Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Average each year over a three-year period. The notional principal is $1 million. If the Dow depreciates by 1 percent, Hewitt will

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If the Dow depreciates by 1 percent, the fixed interest rate of 8 percent that Hewitt Inc. swapped will still need to be paid, resulting in a payment of $80,000. However, since the swap is based on the rate of appreciation on the Dow Jones Industrial Average, a negative appreciation rate will result in additional payments. The amount of the additional payment would be $10,000 for every one percent decrease in the Dow Jones Industrial Average. Therefore, with a 1 percent depreciation, Hewitt Inc. will have to make a total payment of $90,000 ($80,000 + $10,000).