Assume that you are a swap dealer and have just acted as a counter party in an interest rate swap. The notional value of swap is $8M. You are obligated to pay fixed interest of 7%. You will receive a floating rate of LIBOR + 3%. The current LIBOR is 4.5%.

a) If interest rate does not change what will be the annual cash flow for you. (Be specific will it be an inflow or outflow)

b) If LIBOR falls by 2%, then how will the cash flow change?