# S.W.A.P.

A US company enters a cross currency swap with a UK company for a five year term. At initiation the US company paid the UK company \$100m and, with an exchange rate of \$1.6667:£1 the UK company paid the US company £60m. The US company agreed to pay a fixed rate of 6% on the sterling receipt and the UK company agreed to pay 5.5% on its dollar receipt. Payments are due on a six-monthly basis and a 90/360 day count convention is being used. On the first payment date the exchange rate is \$1.7000:£1. Which of the follwing is the most likely cash flow? A) The US company will pay a net £255,000. B) The US company will pay a net £250,000. C) The US company will pay £3.6m and receive \$5.5m D) The US company will pay £1.8m and receive \$2.75m

C

getterdone Wrote: ------------------------------------------------------- > C BINGO!!!

woot! packing it in guys, gotta be up @ 5:45 to study before work, have a good one and happy studying!

I believe its D… If payments are made semiannually…doesnt it cut the annualized payment in half?

getterdone Wrote: ------------------------------------------------------- > woot! packing it in guys, gotta be up @ 5:45 to > study before work, have a good one and happy > studying! Night getterdone!

Of course I didn’t look at the potential answers and calculated the net cash flow to the US company converted into dollars before seeing how easy this was. Definite C

i got C but had to go back to my flash cards to get the process done right. Is this how we should think about it??? Basically, at T = 0 US pays out \$100M and UK pays to US £60M (£60M coming from ----> \$100/exchange rate) then on T = 1 US pays UK (£60)(6%) and it receives \$100M(5.5%), which translates to £3.5 to the UK while the US people get \$5.5 million. If the question asks what happens in T = 5 (last yr of contract), we have to say the the original sums (£60 and \$100M are returned back, right???) In other words, US pays the UK group 3.5 + £60M and the UK pays the US party \$5.5M + \$100M – does the new exchange rate of 1.7 come anywhere into play???

nope you dont use exchange rate in this case

strangedays Wrote: ------------------------------------------------------- > nope you dont use exchange rate in this case thanks, but how come it was used to get £60m.

Because you pay at an exchange rate agreed in the beginning I suppose

strangedays Wrote: ------------------------------------------------------- > Because you pay at an exchange rate agreed in the > beginning I suppose allright, I’ll take it as it as. At least I got the rudiment down. I hate derivatives, even more than GIPS

daj224 Wrote: ------------------------------------------------------- > strangedays Wrote: > -------------------------------------------------- > ----- > > Because you pay at an exchange rate agreed in > the > > beginning I suppose > > > allright, I’ll take it as it as. At least I got > the rudiment down. I hate derivatives, even more > than GIPS I hate test statistics blewwwww

can someone explain why it’s not D?

Guys…payments are due on a 6-monthly basis so the answer should be D

Must be D, payment every six month!

I believe it’s D, A & B are out of the question since there is no netting for currency swaps…