In this workout, we'll take a look at what happens to cash flows in a fixed for floating rate swap arrangement when the variable rate changes. So Company A is the payer in this transaction, enters into a fixed for floating swap arrangement with Company B, who's the receiver in this arrangement. At the date the swap is created, the US dollar 360 day LIBOR is 4.28%. The terms of the agreement are as follow: swap rate, 5.5%, tenor, two years, notional, 1 million, frequency, annual payment and the floating rate is set as US dollar 360 day LIBOR.

If the US dollar 360 day LIBOR has increased to 4.68% at the end of year one, what will be the net cash flows for Company A in year two? So stressing that, in year two. So Company A, of course, receives the variable rate here. So Company A will receive the 4.68% times the $1 million notional. However, Company A, of course, is the payer of the fixed rate here. So Company A will pay out, still pay out the 5.5% fixed rate. So the net cash flows, of course, here have now changed to 8,200 in that year. Let's compare this scenario to what happens if floating rates are down instead. So in Workout B, we're looking at exactly the same trade, exactly the same conditions but if US dollar 360 day LIBOR has decreased to 2.18% at the end of year one, what will be the net cash flows from Company A in year two? So again, in year two.

Well, of course, Company A is the receiver of the variable rate here, so he will receive 2.18% and he will pay the fixed rate here, of course, again and the fixed rate still 5.5% times the notional amount.

So therefore, all of a sudden his net cash flows here are 33,200. So significantly worse, of course, than in Workout A.