Here is a Schweser question that is difficult to understand. Could someone please help to explain how to solve it:
The current US dollar to Canadian dollar exchange rate is 0.7. In a 1 million USD plain vanilla currency swap, the party that is entering the swap to hedge existing exposure to a C$-dominated fixed-rate liability will:
A. receive 1 million USD at the termination of the swap
B. pay a fixed rate based on the yield curve in the United States
C. receive a fixed rate based on the yield curve in Canada.
Thanks
Suny作者: Kapie 时间: 2011-7-13 14:44
I believe the answer is C.
Here is my thinking. A plain vanilla currency swap will be where one party will pay fixed and other floating.
So in order to hedge the liability, I will receive a fixed rate based on yield curve in Canada and pay floating rate based on yield curve in US.作者: onelife1 时间: 2011-7-13 14:44
C is the right answer. And your answer is way clearer! Many thanks!
Suny作者: tianxin 时间: 2011-7-13 14:44
i thought a plain vanilla currency swap was fixed for fixed. plain vanilla in same currency is fixed for floating. i think the answer is c because they have a CAD700,000 liability that they want to hedge so they need to get that at some point in the future.作者: ppls 时间: 2011-7-13 14:44
So in a fixed for fix currency swap, how can Answer C be correct without Answer B also being correct???作者: 5566 时间: 2011-7-13 14:45
Investor83 Wrote:
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> So in a fixed for fix currency swap, how can
> Answer C be correct without Answer B also being
> correct???
It can't because you would be paying US floating rates.
