Question in issue is Q11 - one on currency swaps. Full question here (https://www.cfainstitute.org/programs/cfaprogram/courseofstudy/Documents/sample_level_III_itemset_questions.pdf)
Dantas knows that AS currently needs to borrow an additional R30,000,000 for 5 years to fund its growth. Brazilian credit markets have tightened and it would cost 17.70 percent per year to borrow this amount locally, but AS can obtain a yen-denominated loan at a fixed rate of 9.50 percent. This would expose it to substantial currency risk. A 5-year currency swap is available in which AS would pay interest in real to the counterparty at 12.20 percent and receive interest in yen from the counterparty at 7.10 percent. The current exchange rate is ¥40/R.
- If AS enters into the yen-real currency swap with a notional principal of ¥1.2 billion (R40.0 million), net yen interest expense for each year is closest to: A. ¥28.80 million. B. ¥85.20 million. C. ¥114.00 million.
Answer was A
Answer: If AS borrows in yen, it will borrow ¥1.2 billion (=R30,000,000 × ¥40/R). In order to hedge this, it will enter into a currency swap with a notional principal of ¥1.2 billion/R30,000,000. It will receive 7.10% in yen from the swap and pay 9.50% in yen on the loan, for a net payment of 2.40% (on ¥1.2 billion) or ¥28.80 million
I am not understanding why the 12.2% AS needs to pay is not taken into account?