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-rate payer and FF is the floating-rate payer. 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 end of year 3, FF will pay which of the following total amounts?
Select one:
a. FC2,060,000
b. $1,080,000
c. FC2,160,000
d. $1,000,000
