A U.S. firm (U.S.) and a foreign firm (F) engage in a plain-vanilla currency swap. The fixed rate at initiation and at the end of the swap was 5%. The variable rate at the end of year 1 was 4%, at the end of year 2 was 6%, and at the end of year 3 was 7%. At the beginning of the swap, $2 million was exchanged at an exchange rate of 2 foreign units per $1. At the end of the swap period the exchange rate was 1.75 foreign units per $1. At the end of year 1, firm: A) U.S. pays firm F $200,000. B) F pays firm U.S. $200,000. C) F pays U.S. 200,000 foreign units. D) U.S. pays firm F 200,000 foreign units. Can someone please explain this? Who pays fixed and receives floating? and in which currency? I think in a plain Vanilla pays fixed for floating - is that correct?
very confusing problem …
I think there is insufficuent information to go ahead and identify who is the fixed and who is floating?
.
c?
so we are talking about first year there is either a payment at 4% or one at 5% this is made on notional amt of 2mil us or 4 mil foreign. the only one that meets criteria is 4mil foreign at 5% of course they don’t provide new info on exchange rate
the thing that is unclear though is who makes the payment in foreign? it would be either C or D
Ans is D - I dont understand this answer either A plain-vanilla currency swap pays floating on dollars and fixed on foreign. Fixed on foreign 0.05 × $2,000,000 × 2 foreign units per $1 = 200,000 foreign units paid by the U.S. firm.
What’s not clear about that answer?
Does a plain Vanilla currency swap always pay floating on dollars and fixed on foreign?