optiix

A U.S. firm that wishes to convert its annual cash flows of €20 million each to dollars upon receipt. The exchange rate is currently €0.9/USD, and the swap rates in the U.S. and Europe are both 6.1 percent. Appropriately using a fixed-for-fixed currency swap that does not exchange principal, what would be the annual dollar cash flow to the firm?

A) $32,786,885.

B) $10,980,000.

C) $22,222,222.

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At current interest rates, the €20 million per year translates to a notional principal of:

NP = 20,000,000 / 0.061
NP = €327,868,852

The corresponding dollar amount is $364,298,725 = €327,868,852 / (€0.9/$). The annual interest payments on this amount would be $22,222,222 = $364,298,725 × 0.061.

optiix

A U.S. firm that wishes to convert its quarterly cash flows of €7 million each to dollars upon receipt. The exchange rate is currently €0.8/US$, and the swap rates in the U.S. and Europe are 5.2 percent and 5.6 percent respectively. What should be the notional principal of a currency swap, where the principal is not exchanged and the rates are fixed, that will accomplish the goal?

A) $625,000,000.

B) €500,000,000.

C) $8,125,000.

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At current interest rates, the €7 million per quarter translates to a notional principal in the foreign currency of:

NP = 7,000,000 / (0.056 /4)
NP = €500,000,000

The notional principal in U.S. dollar terms is: €500,000,000 X US$/ €0.8 = $625,000,000
The quarterly cash flows on the swap would then be $625,000,000 X 0.52/4 = $8,125,000

optiix

A U.S. firm that wishes to convert its annual cash flows of €10 million each to US$ upon receipt. The exchange rate is currently 0.9€/$, and the swap rates in the U.S. and Europe are 5.4% and 5% respectively. Appropriately using a fixed-for-fixed currency swap that does not exchange principal, what would be the annual dollar cash flow to the firm?

A) $22,222,222.

B) $11,111,111.

C) $12,000,000.

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At current interest rates, the €10 million per year translates to a notional principal of:

NP = 10,000,000 / 0.05
NP = €200,000,000

The corresponding dollar amount is $222,222,222 = €200,000,000 / (0.9€/$). The annual interest payments on this amount would be $12,000,000 = $222,222,222 × 0.054.

optiix

A manager of a $300 million bond portfolio consisting of $50 million in investment-grade corporate bonds and $250 million in U.S. Treasuries wants to re-weight to a 50/50 mix. This can be done with a bond-index swap with a notional principal of:

A) $100 million.

B) $275 million.

C) $250 million.

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The swap would exchange the return on $100 million in U.S. Treasuries for the return on $100 million of the corporate bonds. This would create a synthetic mix of $150 million in each position.