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 floating in C$. B) receive floating in C$. C) receive $1 million at the termination of the swap. D) pay C$1,428,571 at the beginning of the swap.
b 1luv
they want to recieve a C$ fixed - so I think it has to be D?
They are worried about Fixed-Rate-CAD liability and want to hedge it off. So they will enter the SWAP contract as a fixed-rate-CAD-receiver and lock close-out the exposure, but since the contract amount is $1m, they will have to pay 1m/[0.7/CAD] = 0.142857m as contract initiation = D ?
Yep, D for me as well for the reasons DS mentions.