SWAPS- Question 14 on Page 534

Why answer is B and not A. My rationale behind answer A: Millau being the party with the cheaper financing in Euro should be paying the periodic Euro finance cost and the counterparty paying the Swiss Franc. Thanks for your help

In a currency swap - The interest is paid on the notional amount of the currency borrowed. Since Millau (EUR) borrowed CHF in the swap transaction, I would not even look at choice A, as it says that Millau pays periodic payment in EUR and receives periodic payment in CHF. HTH

Thanks But I still dont get it. Millau will get the EUR proceeds, then swap it to CHF and pay cheaper EUR interest compare to counterparty. Why would Millau pay interest in CHF- it defeats the whole purpose of currency swap My understanding comes from schweser(main example to explain CCY swap) where a US company has a Euro loan. When the swap happens, its pays interest on US loan although it originally borrowed Euro.

Schweser-Book-4-Pg228 The US company pays interest on euro borrowing = -600K So US company is not paying interest on US loan.

It pays the Euro interest to Bondholders and not to the counterparty. At the end, its net borrowing cost is libor on $loan- which is what is exchanged with the counterparty

I got it- its an application of LOS 40 e. The concept of Schweser Book 4- Pg 228 illustrate a situation when a party has a foreign currency loan already and want to eliminate currency risk through a currency swap.

Let me think through this. I usually draw a picture, but let me try just words… End goal - get CHF100M (borrow CHF100M). Millau might not get that awesome rate of 0.8%, if it tries to borrow directly in that market. So it needs to find a way to get that rate. Strategy: swap euro for CHF. To do that Millau needs to find 100M/1.5540 euros (or 64.35M euros). So it issues a euro bond and pays 2.8% on 64.35M. Milliau now can use this money and exchange it for CHF100M. In this swap transaction, Millau would get the desired annual rate of 0.8% on CHF100M (meaning pay 0.8% on CHF100M) and receive 2.3% on 64.35M. In the net terms, it only loses a small fraction (2.3 - 2.8%). Had Millau borrowed directly, it might have ended up paying much more… Ideally, if Millau expects that euro interest rates will go up, it should choose to receive floating… Sorry for being so thorough… some of you might say, “duh!” I partially wrote it out for myself - to better understand the issue… Thanks! =) Good luck, guys!

I might have the same question in late may. To keep the life easier, I simplify the situation like this. I have to pay CHF periodically because I got CHF from the counterparty. The rate? It’s CHF’s swap fixed rate.