consider 5-year fixed-for-fixed currency swap agreement between Shell and BP. Un
ID: 2614766 • Letter: C
Question
consider 5-year fixed-for-fixed currency swap agreement between Shell and BP. Under the contract BP pays a fixed rate of interest of 5% in sterling and receives a fixed rate of interest of 4% in dollars from BP. Interest rate payments are made once a year and principal amounts of $15 million and £10 million. which of the following is FALSE?
A. at outset, Shell pays $15 million and receives £10 million
B. each year Shell receives $0.6 million and pays £0.5 million
C. each year BP receives $0.5 million and pays £0.6 million
D. at the end, Shell pays $10 million and receives £15 million
E. last year Shell receives £10.70 million and pays $15.60 million
Explanation / Answer
C is wrong ,
As it currency swap which means that BP & shell hass exchanged there obligations i.e BP orginally was to borrow sterling of 10 million higher rate than 5 % and on same ground shell was orginally was to borrow 15 million $ @ higher rate than 4 %.
Rather than borrowing as per there orginal suitation they have entered into curreny swap i.e BP will borrow $15 million @ 4% and Shell will borrow sterling 10 million @ 5%.
They will settle there obligation st the end of 5 year.
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