Question 29: Assume you have the long GBP position in a S-Year at-market fixed-f

Question

Question 29: Assume you have the long GBP position in a S-Year at-market fixed-for-fixed USD/GBP currency swap. Payments occur at the end of each year. The notional amount is USD 5,000. The interest rates are ruso-396 and rGBP-696. Te spot rate when the contract originated was XUSD/GBP = 1.60. At the end of year 5, the spot rateis ysP 1.50. Which of the following two statements is correct? SI: Att S, the size of the difference check for the interest payment is USD 131.25 S2: Att-s, the size of the difference check for the principal payment is USD 625.00 a) Si is correct but $2 is false b) S2 is correct but S1 is false c) Both, SI and S2 are correct d) Both, SI and S2 are false

Explanation / Answer

Notional Amount =USD 5,000

USD Interest Rate, rUSD = 3%

GBP Interest Rate, rGBP = 6%

Spot Rate, SUSD/GBP = 1.60

5-Year Forward Rate, SUSD/GBP = 1.50

Since, it is a currency swap, there will be an exchange of foreign currency at the prevailing rates.

Initial Principal for USA =USD 5,000/1.00 =USD 5,000

Initial Principal for Britain =GBP 5,000/1.60 =GBP 3,125

Fixed Interest Rate in USA =$0.03 x 5,000 =$150

Fixed Interest Rate in Britain =GBP0.06 x 3,125 =GBP 187.50 or $187.50x1.50 =$281.25

At t=5, the size of difference check for interest payment is = $281.25 - 150 =$131.25 => S1 is correct

At t=5, the size of difference check for principal payment is =$5,000 - 3,125x1.50 =$312.50 => S2 is incorrect

Hence, Option-a is the right answer.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.