Consider a 3-year annual currency swap that takes place between a foreign firm (FF) with FC currency
Question:
Consider a 3-year annual currency swap that takes place between a foreign firm (FF) with FC currency units and a U.S. firm (USF) with $ currency units. USF is the fixed-ratepayer and FF is the floating-ratepayer. The fixed interest rate at the initiation of the swap is 7%, and 9% at the end of the swap. The variable rate is 5% currently; 6% at the end of year 1; 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 FC1.5 = $1.0.
Note: With this currency swap, end-of-period payments are based on beginning-of-period interest rates.
At the termination of the swap, FF gives USF which of the following notional amounts?
Select one:
a. $1.0m
b. FC1.0m
c. $1.5m
d. FC1.5m