company enters a currency swap in which it pays a fixed rate in a foreign currency, the Canadian Dollar, and the Canadian counterparty pays a fixed…
A U.S. company enters a currency swap in which it pays a fixed rate in a foreign
currency, the Canadian Dollar, and the Canadian counterparty pays a fixed rate in
US dollars. The notional principals are USD7,500,000 and CD10,000,000. The xed
rates are 5.6% (LIBOR, annualized) in U.S. dollars and 4% (LIBOR, annualized) in
Canadian dollars. Both sets of payments are made on the basis of 30 days per month
and 360 days per year, and the payments are made semi-annually.
(a) Determine the initial exchange of cash that occurs at the start of the swap.
(b) Determine the semi-annual payments.
(c) Determine the annual exchange of cash that occurs at the end of the swap.
(d) Give an example of a situation in which this swap might be appropriate.
