Reading 63: Swap Markets and Contracts Los d~Q1-5

interpret, different, determine, currency, principal

LOS d: Calculate and interpret the fixed rate, if applicable, and the foreign notional principal for a given domestic notional principal on a currency swap, and determine the market values of each of the different types of currency swaps during their lives.

Q1. The current U.S. dollar ($) to Canadian dollar (C$) exchange rate is 0.7. In a $1 million currency swap, the party that is entering the swap to hedge existing exposure to C$-denominated fixed-rate liability will:

A) pay C$1,428,571 at the beginning of the swap.

B) receive floating in C$.

C) pay floating in C$.

Q2. Consider a one-year currency swap with semiannual payments. The payments are in U.S. dollars and euros. The current exchange rate of the euro is $1.03 and interest rates are

	180 days	360 days
LIBOR	5.6%	6.0%
Euribor	4.8%	5.4%

What is the fixed rate in euros?

A) 2.659%.

B) 5.245%.

C) 5.318%.

Q3. A U.S. firm (U.S.) and a foreign firm (F) engage in a plain-vanilla currency swap. The fixed rate at initiation and at the end of the swap was 5%. The variable rate at the end of year 1 was 4%, at the end of year 2 was 6%, and at the end of year 3 was 7%. At the beginning of the swap, $2 million was exchanged at an exchange rate of 2 foreign units per $1. At the end of the swap period the exchange rate was 1.75 foreign units per $1.

At the termination of the swap, firm F gives firm U.S.:

A) $1,750,000.

B) 4 million foreign units.

C) $2 million.

Q4. 90 days ago the exchange rate for the Canadian dollar (C$) was $0.83 and the term structure was:

	180 days	360 days
LIBOR	5.6%	6%
CDN	4.8%	5.4%.

A swap was initiated with payments of 5.3% fixed in C$ and floating rate payments in USD on a notional principal of USD 1 million with semiannual payments.

90 days have passed, the exchange rate for C$ is $0.84 and the yield curve is:

	90 days	270 days
LIBOR	5.2%	5.6%
CDN	4.8%	5.4%

What is the value of the swap to the floating-rate payer?

A) ?$2,708.

B) $3,472.

C) $10,125.

Q5. Consider a fixed-for-fixed 1-year $100,000 semiannual currency swap with rates of 5.2% in USD and 4.8% in CHF, originated when the exchange rate is $0.34. 90 days later, the exchange rate is $0.35 and the term structure is: