Which of the following is true for the party paying fixed in a newly negotiated interest rate swap when the yield curve is upward sloping?
A. The early forward contracts underlying the swap have a positive value and the later ones have a negative value
B. The early forward contracts underlying the swap have a negative value and the later ones have a positive value
C. The swap is designed so that all forward contracts have zero value
D. Sometimes A is true and sometimes B is true
B
The forward contracts are contracts where fixed is paid and floating is received. They can be valued assuming that forward rates are realized. Forward rates increase with maturity. This means that the value of the forward contracts increase with maturity. The total value of the forward contracts is zero. This means that the value of the early contracts is negative and the value of the later contracts is positive.
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