A U.S. company (firm XYZ) enters into a currency swap in which it pays a fixed r

Question

A U.S. company (firm XYZ) enters into a currency swap in which it pays a fixed rate of 4.5 percent on a notional principal of € 90 million, while a dealer pays a fixed rate of 5.0 percent a notional principal of $100 million, with semiannual payments based on 30 day months and 360 days per year for both parties; the parties exchange notional principals at the beginning of the swap period. The final exchange from the dealer to firm XYZ would be:

$92,250,000

$102,500,000

$102,750,000

$102,025,000

$92,025,000

Explanation / Answer

Solution :

In this swap contract there are two parties Firm XYZ and the Dealer

At the start of the swap

Firm XYZ: Will pay $100 million and recieve  € 90 million from the dealer

Now Payment after 6 months : Firm XYZ will pay 2.25% [4.5/2, payment is semi annual ] on € 90 million, and the dealer will pay 2.5%[5/2] on $100 million.

Final payment by dealer will be: $100,000,000 + 2.5%. 100,000,000 = $102,500,000

Final payment by the XYZ company = € 90 million + € 90 million * 2.25% = € 92,025,000

So final exchange will be $102,500,000

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