Question $4$: Currency Swaps $(2/10)$ Suppose, to build the Guangzhou campus,

HKUST has issued a $3-$year Chinese Yuan $($CNY$)$ bond with a par value of $1$M CNY and a

$3\%$ yearly coupon rate. HKUST wants to lock in payments in terms of Hong Kong Dollars

$($HKD$).$ Right now, the exchange rate is S$0=1\mathrm{.}1$ HKD $/$ CNY$.$ The CNY$-$dominated

interest rate is $3\%$ and the HKD$-$dominated interest rate is $5\%($both annual, continuously

compounding$).$

$($i$)$ How does the bond require HKUST to pay back in terms of CNY$?$

$($ii$)$ If HKUST uses fairly priced currency forwards, what are their payments each year in

terms of HKD$?$

$($iii$)$ Suppose a swap contract allows HKUST to swap the payments of the $3-$year CNY

bond to payments of a $3-$year HKD bond with a par value of $$1$M and a $9\%$ yearly

coupon rate, what are the payments each year in terms of HKD$?$

$($iv$)$ Would you prefer to take $($ii$)$ or $($iii$)?$