 # Schweser currency swap question

P236 Q7-10 Consider a 3-year annual currency swap that takes place between a foreign firm(FF) with FC currency units and a United States Firm (USF) with \$ currency units. USF is the fixed-rate payer and FF is the floating -rate payer. The fixed interest rate at the initiation of the swap is 7%, and 8 % at the end of swap. The variable rate is 5% currently; 6% at the end of year1;8% at the end of year 2; and 7% at the end of year 3. At the beginning of the swap, \$1.0 million is exchanged at an exchange rate of FC2.0=\$1.0. At the end of the swap period the exchange rate is FC 1.5=1.0. NOTE: with this currency swap, end-of-period payments are based on beginning of period interest rates. 8. at the end of year 2. USF pays FC 140,000; FF pays 60,000 How can you get this answer? I feel confused about the explanation( the currency swap is pay floating on dollars and pay fixed on foreign. Floating at the end of year 1 is 6% of 1.0 million. Since payments are mande in arrears. FF pays 60,000 and USF pays FC 140,000 at the end of year 2. What I found in questinon is USF is the fixed-rate payer and FF is the floating -rate payer. So I think USF fixed-rate corresponds to 7%,8%; FF floating rate corresponds to 6%,8%,7%. Since it is totally diffent from answers. 10. at the end of year3, FF will pay 1,080,000. how can we get 80,000 at year 3? in all, I totally lost in this question. Can anyone help me to give a detail explaination at Q7-10? I want to find out the process how it swap. Thanks.

Let me see if I can answer atleast the easy one: “at the end of year3, FF will pay 1,080,000. how can we get 80,000 at year 3?” combined with: "NOTE: with this currency swap, end-of-period payments are based on beginning of period interest rates. 8. at the end of year 2. USF pays FC 140,000; FF pays \$ 60,000 " tells me that EOY3, we would be working with variable rate of EOY2 (Note: Most rates don’t change overnight. For e.g. a floating rate home loan payment will get affected by a rate change some time back; we use the term lookback period). EOY2 variable rate is 8%

Consider a 3-year annual currency swap that takes place between a foreign firm(FF) with FC currency units and a United States Firm (USF) with \$ currency units. USF is the fixed-rate payer and FF is the floating -rate payer. The fixed interest rate at the initiation of the swap is 7%, and 8 % at the end of swap. The variable rate is 5% currently; 6% at the end of year1;8% at the end of year 2; and 7% at the end of year 3. At the beginning of the swap, \$1.0 million is exchanged at an exchange rate of FC2.0=\$1.0. At the end of the swap period the exchange rate is FC 1.5=1.0. Beginning USF pays FC 1 Million FC pays USF 2 Million FC At the end of Year 2: Interest rates for FC would be applied to the 1Mill , For the USF on the 2 Million FC Fixed USF Interest rate is 7%, so USF Pays FC = 2000000 \* 7% = 140000FC Floating FC Interest rate is 6% end of Year 1. So Year 2 Payment for FC = 1 Million * .06 = 60000\$ Ans. At the end of Year 3: Fixed Rate: 8% Floating Rate: 8% end of Year 2. So Floating Payment = 1 Million \* 8% = 80000 also the notional amount of 1 Million is returned. So total payment = 1080000 .

thanks

Now I have one more question: At the end of Year 2: Interest rates for FC would be applied to the 1Mill , Why can't we use interest rates for USF, since having 1 Mill ? Because atP229 example fixed-for fixed currency swap AA amd BB swap currencies AA get USD1.0 million, agreeing to pay BB 10% interest in USD annually.( it pay BB in USD interest rate, not AUD interest rate. it is different from what you said) BB get AUD 2.0 million, agreeing to pay AA 8% interest in USD annually. thanks.