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A U.S. firm (U.S.) and a foreign firm (F) engage in a plain-vanilla currency swap; U.S. is the fixed rate payer. The fixed rate at initiation 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 end of year 1, firm:

A) F pays firm U.S. $200,000.

B) U.S. pays firm F 200,000 foreign units.

C) U.S. pays firm F $200,000.

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A plain-vanilla currency swap pays floating on dollars and fixed on foreign. Fixed on foreign 0.05 × $2,000,000 × 2 foreign units per $1 = 200,000 foreign units paid by the U.S. firm.

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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) receive floating in C$.

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

C) pay floating in C$.

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The receive-fixed C$ position will pay 1,000,000/0.7 = C$1,428,571 at swap inception (in exchange for $1 million) and get it back at termination.

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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 $1.30 and interest rates are

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

What is the fixed rate in euros?

A) 5.318%.

B) 2.659%.

C) 5.245%.

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The present values of 1 euro received in 180 days and 1 euro received in 360 days are: 1/(1 + 0.048 × (180/360)) = 0.9766 and 1/1.054 = 0.9488
The fixed rate in euros is (1 - 0.9488) / (0.9766 + 0.9488) = 0.026592 × (360/180) = 5.318%. The notional principal is 100,000/1.30 = 76,923 euros.

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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) $2 million.

B) $1,750,000.

C) 4 million foreign units.

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At termination, the notional principal will be exchanged. Firm F gives back what it borrowed, $2 million, and the terminal exchange rate is not used.

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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) $10,126.

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The present value of the USD floating-rate payment is:

(1.028 / 1.013) = 1.014808
1.014808 × 1,000,000 = $1,014,808
The present value of the fixed C$ payments per 1 CDN is:

(0.0265 / 1.012) + (1.0265 / 1.0405) = 1.012731 and for the whole swap amount, in USD is 1.012731 × 0.84 × (1,000,000 / 0.83) = $1,024,932
−1,014,808 + 1,024,932 = $10,126

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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:

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

What is the value of the swap to the USD payer?

A) -$2,719.

B) $2,814.

C) $2,719.

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The present value of the fixed payments on one CHF is
0.02372 + 0.98414 = 1.00786.At the current exchange rate the value is 1.00786 × 0.35 = USD 0.35275. The notional amount is 100,000/0.34 = 294,118 CHF so the dollar value of the CHF payments is 0.35275 × 294,118 = $103,750.
The present value of the USD payments is 0.02567 + 0.98464 = 1.01031
1.01031 × 100,000 = $101,031.
The value of the swap to the dollar payer is 103,750 – 101,031 = $2,719.

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Consider a fixed-rate semiannual-pay equity swap where the equity payments are the total return on a $1 million portfolio and the following information:

• 180-day LIBOR is 5.2%
• 360-day LIBOR is 5.5%
• Dividend yield on the portfolio = 1.2%

What is the fixed rate on the swap?

A) 5.4234%.

B) 5.4197%.

C) 5.1387%.

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Consider a fixed-rate semiannual-pay equity swap where the equity payments are the total return on a $1 million portfolio and the following information:

• 180-day LIBOR is 4.2%
• 360-day LIBOR is 4.5%
• Div. yield on the portfolio = 1.2%

What is the fixed rate on the swap?

A) 4.3232%.

B) 4.4477%.

C) 4.5143%.

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= 0.022239 × 2 = 4.4477%

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Consider a $5 million semiannual-pay floating-rate equity swap initiated when the equity index is 760 and 180-day LIBOR is 3.7%. After 90 days the index is at 767, 90-day LIBOR is 3.4 and 270-day LIBOR is 3.7. What is the value of the swap to the floating-rate payer?

A) −$2,726.

B) $3,526.

C) −$3,526.

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1.0185 = 1 + 0.037(180/360)
1.0085 = 1 + 0.034(90/360)
767/760 – 1.0185/1.0085 = −0.00070579 × 5,000,000 = −$3,526
Note: The 1.0185/1.0085 is the present value of the floating rate side after 90 days.

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Consider a semiannual equity swap based on an index at 985 and a fixed rate of 4.4%. 90 days after the initiation of the swap, the index is at 982 and London Interbank Offered Rate (LIBOR) is 4.6% for 90 days and 4.8% for 270 days. The value of the swap to the equity payer, based on a $2 million notional value is closest to:

A) $22,564.

B) $22,314.

C) −$22,564.

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−$22,564 is the value to the fixed-rate payer, thus $22,564 is the value to the equity return payer