In this workout, we're taking a look at the basic cash flows of a plain vanilla fixed for floating rate swap arrangement. So A, the payer enters into a fixed for floating swap arrangement with B, the receiver. At the date the swap is created, the US dollar 360-day LIBOR is 4.28%. The terms of the agreement are as follows. The fixed rate is 5.5% and the tenure is two years, so that means the two-year swap rate when this trade was done was 5.5%. The notional is $1 million, the frequency of payments is annual, and the floating rate is decided to be the US dollar 360-day LIBOR.

What are the cash flows for B in year one? Well, first of all, B pays the variable rate cash flow, so he's paying 4.28% times the notional amount.

B is the receiver here, so he will receive the fixed payment, and that will be 5.5% times the $1 million notional.

So of course, the net cash flow here for B is 12,200.

Let's have a look at the opposite side of this trade.

So this is the same trade as we just looked at here, but in this case, we are being asked what are the cash flows from A in year one? Well, of course, A is the payer of fixed here, so he will receive the floating rate, 4.28, but he will pay the fixed rate, 5.5%.

And of course, this net cash flow then will be minus 12,200. So the cash flows from A and the cash flows from B are of course a mirror image here.