While I got the right answer to 17.2 of schweser mock #2, I still can’t understand HOW the answer can be right. Anderson gets CHF 12mm every quarter. The exchange rate is 1.24 CHF/$, the US interest rate 2.8% and the Swiss interest rate 6.6%. If you do the math, the implied notional principal is CHF727,272,727 or $586,510,264 and the quarterly cash flow is $4.1mm. The maths are easy enough, and that answer is correct. But if you step back and look at it, what we’re saying is that Anderson will give up CHF 12mm, which would be worth 12/1.24 = $9.7mm at the spot rate, for just $4.1mm. How can that possibly be a sensible transaction? Can someone help me understand the intuition?
its not trying to tell us if the swap makes economic sense, its saying if the swap happens, what are the corresponding cash flows.
The price of anything is what the marginal buyer is willing to pay for it. As I read it, this isn’t a transaction anyone would enter into, so there’s something wrong with the process described. I’m sure I’m missing something that would make this transaction rational – I’m curious to know what that is.