Question

6. Find the upcoming interest payments in a currency swap in which party A pays U.S. dollars at a fixed rate of 5 percent p.a. on a notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4 percent p.a. on a notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year, and there is no netting. A. party A pays $2,500,000, and party B pays SF1,400,000 B. party A pays SF1,400,000, and party B pays $2,500,000 C. party A pays SF1,750,000, and party B pays SF1,400,000 D. party A pays $2,500,000, and party B pays $2,000,000 E. party A pays $50 million, and party B pays SF35 million 7. A company enters into an interest rate swap where it is paying fixed and receiving LIBOR. When interest rates increase, which of the following is true? A. The value of the swap to the company decreases B. The value of the swap to the company increases C. The value of the swap can either increase or decrease D. The value of the swap does not change providing the swap rate remains the same E. None of the above

Answer 1

Solution:

Question 6 )

Since party A pays 5% on notional amount of $50 million . Hence total payment will be 5% * 50 million = $2,500,00

Party B pays 4% on notional amount of SF 35 million . Total payment will be 4% * SF 35 million = SF 1,400,000

Since there is no netting, the party A will pay $2,500,000 million and party B will pay SF 1,400,000

Correct option is A

Question 7 )

Since the company pays fixed rate and receives LIBOR , hence when interest rate increases then the payment will be fixed as the company pays fixed rate. While LIBOR will increase due to interest rate increase hence the company will receive more.

Hence the value of swap will increase for the company

Correct option is B )