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F5205 Quiz - 3 Fall 2012

This document contains 6 questions about currency swaps. Question 1 describes a 5-year fixed-for-fixed currency swap between British pounds and US dollars. Question 2 asks about the difference check amount at time 1 of the swap described in Question 1. Question 3 provides additional details about the swap in Question 1 and asks whether a difference check would be received or sent at time 1.

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43 views1 page

F5205 Quiz - 3 Fall 2012

This document contains 6 questions about currency swaps. Question 1 describes a 5-year fixed-for-fixed currency swap between British pounds and US dollars. Question 2 asks about the difference check amount at time 1 of the swap described in Question 1. Question 3 provides additional details about the swap in Question 1 and asks whether a difference check would be received or sent at time 1.

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mauricio0327
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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GLOBAL FINANCE

FALL 2012
QUIZ #3
1. You wish to enter into a 5-year fixed-for-fixed currency swap, such that the cash-
flow stream you are paying (in the swap) is in British pounds and the cash-flow
stream you are receiving is in U.S. dollars. The swap is to be based on a notional
principal of $1,000,000. What are the cash flows upon which the currency swap is
based, from the point of view of your position, if the swap is an at-market swap and if
the 5-year par coupon rates are 7% for dollars and 9% for pounds, and if the spot
exchange rate is currency 2.00$/£.

2. In the previous swap problem, how much is the time-1 difference check, if the spot
exchange rate at that time is 1.00 $/£?

3. In the previous problem, if the spot exchange rate at time-1 is 1.80 $/£;
a. Would you receive a difference check from the swap counterparty, or would
you send one?
b. What is the amount of the difference check?

4. Consider a 2-year swap of 6% fixed coupon dollars for 7% fixed coupon yen on
$1,000,000 of notional principal. The swap originates when the spot rate is 120 ¥/$.
If, at the swap’s origination, the dollar discount yield curve is a flat 6%, while the yen
discount yield curve is a flat 4%. What is the time-0 value of the swap?

5. A dollar-Swiss franc swap with a maturity of five years was contracted by Papaf Inc.
three years ago. Papaf swapped $100 million for CHF 250 million. The swap
payments were annual, based on market interest rates of 8% in dollars and 4% in
CHF. In other words, Papaf Inc. contracted to pay dollars and receive CHF. The
current spot exchange rate is 2 CHF/$, and the current interest rates are 6% in CHF
and 10% in $ (the term structures are flat).
a. What is the swap payment at the end of year 3? Does Papaf pay or receive?
b. On the final date of the swap, the spot exchange rate is 1.5 CHF/$. What is
the final swap payment at the end of year 5?

6. A five-year currency swap involves two AAA borrowers and has been set at current
market interest rates. The swap is for U.S.$100 million against AUD 200 million at
the current spot exchange rate of AUD/$ 2.00. The interest rates are 10% in U.S.
dollars and 7% in Australian dollars, or annual swaps of U.S.$10 million for AUD 14
million. A year later, the interest rates have dropped to 8% in U.S. dollars and 6% in
Australian dollars, and the exchange rate is now AUD/$ 1.9.
a. What should the market value of the swap be in the secondary market?

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