Currency swap question - Schweser

CFA Level II
#1

Hello, Here is a Schweser question that is difficult to understand. Could someone please help to explain how to solve it: The current US dollar to Canadian dollar exchange rate is 0.7. In a 1 million USD plain vanilla currency swap, the party that is entering the swap to hedge existing exposure to a C$-dominated fixed-rate liability will: A. receive 1 million USD at the termination of the swap B. pay a fixed rate based on the yield curve in the United States C. receive a fixed rate based on the yield curve in Canada. Thanks Suny

#2

I believe the answer is C. Here is my thinking. A plain vanilla currency swap will be where one party will pay fixed and other floating. So in order to hedge the liability, I will receive a fixed rate based on yield curve in Canada and pay floating rate based on yield curve in US.

#3

C is the right answer. And your answer is way clearer! Many thanks! Suny

#4

i thought a plain vanilla currency swap was fixed for fixed. plain vanilla in same currency is fixed for floating. i think the answer is c because they have a CAD700,000 liability that they want to hedge so they need to get that at some point in the future.

#5

yeah, just looked it up. at initiation they swap principal so us firm gives candandian firm $1,000,000 and they get CAD700,000. each quarter they get the net of the fixed rate determined at initiation multiplied by the exghange rate at the time. then at the end they swap their principals back

#6

So in a fixed for fix currency swap, how can Answer C be correct without Answer B also being correct???

#7

Investor83 Wrote: ------------------------------------------------------- > So in a fixed for fix currency swap, how can > Answer C be correct without Answer B also being > correct??? It can’t because you would be paying US floating rates.