A Canadian corporation (ACC) has just entered into a two-year currency swap contract with Big Dealer Bank (BDB). The swap contract requires ACC to make semi-annual payments in Canadian dollars (C$) and receive semi-annual payments in U.S. dollars (US$). The notional amount in Canadian dollars is C$25 million. The accrual period for the swap is 180/360, assuming 360 days per year. The US$/C$ spot exchange rate is 0.77, with the Canadian dollar being the domestic currency for ACC. The term structures of C$ LIBOR and US$ LIBOR are as follows: Days C$ LIBOR (%) US$ LIBOR (%) 180 0.50 0.55 360 0.60 0.65 540 0.65 0.75 720 0.70 0.85 a. What is the notional amount in U.S. dollars? b. Calculate the fixed rates in Canadian and U.S. dollars.

A Canadian corporation (ACC) has just entered into a two-year currency swap contract with Big Dealer Bank (BDB). The swap contract requires ACC to make semi-annual payments in Canadian dollars (C$) and receive semi-annual payments in U.S. dollars (US$). The notional amount in Canadian dollars is C$25 million. The accrual period for the swap is 180/360, assuming 360 days per year. The US$/C$ spot exchange rate is 0.77, with the Canadian dollar being the domestic currency for ACC. The term structures of C$ LIBOR and US$ LIBOR are as follows: Days C$ LIBOR (%) US$ LIBOR (%) 180 0.50 0.55 360 0.60 0.65 540 0.65 0.75 720 0.70 0.85 a. What is the notional amount in U.S. dollars? b. Calculate the fixed rates in Canadian and U.S. dollars.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter10: Measuring Exposure To Exchange Rate Fluctuations

Section: Chapter Questions

Problem 2ST

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A Canadian corporation (ACC) has just entered into a two-year currency swap contract with Big Dealer Bank (BDB). The swap contract requires ACC to make semi-annual payments in Canadian dollars (C$) and receive semi-annual payments in U.S. dollars (US$). The notional amount in Canadian dollars is C$25 million. The accrual period for the swap is 180/360, assuming 360 days per year. The US$/C$ spot exchange rate is 0.77, with the Canadian dollar being the domestic currency for ACC. The term structures of C$ LIBOR and US$ LIBOR are as follows: Days C$ LIBOR (%) US$ LIBOR (%) 180 0.50 0.55 360 0.60 0.65 540 0.65 0.75 720 0.70 0.85 e. Assume 240 days has passed since the initiation of the currency swap contract. The new exchange rate is US$0.85/C$. Assume that, on Day 180, the 180-day C$ and U.S.$ LIBORs remained the same, at 0.5% and 0.55%, respectively. Calculate the value of the swap given the following LIBOR term structures at time 240.…
A Canadian corporation (ACC) has just entered into a two-year currency swap contract with Big Dealer Bank (BDB). The swap contract requires ACC to make semi-annual payments in Canadian dollars (C$) and receive semi-annual payments in U.S. dollars (US$). The notional amount in Canadian dollars is C$25 million. The accrual period for the swap is 180/360, assuming 360 days per year. The US$/C$ spot exchange rate is 0.77, with the Canadian dollar being the domestic currency for ACC. The term structures of C$ LIBOR and US$ LIBOR are as follows: Days C$ LIBOR (%) US$ LIBOR (%) 180 0.50 0.55 360 0.60 0.65 540 0.65 0.75 720 0.70 0.85 c. Calculate the first semi-annual payments for the swap if the terms of the swap specify that ACC receives fixed rates and pays floating rates. d. What is the value of the currency swap at the time of contract initiation?
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A two-year semi-annual floating rate currency swap takes place between A (UK based) and B (Aus based). A wants to borrow in Australian dollars and B wants to borrow in British pounds. The original exchange rate is $1.50 for £1.00 and at the end of two years it is $1.30 for £1.00. Interest rates in Aus were 5% at initiation, while interest rates in the UK were 7% at initiation. The principal is $5 million and interest payments are determined in advance, and payable in arrears. At initiation of the swap, A will pay the following to amount to B: Group of answer choices £3.33 million $3.33 million $5.00 million £7.5 million zero, since no cash flows are exchanged at the start of the swap
Currently, the spot exchange rate is $1.56 per £ and the three-month forward exchange rate is $1.58 per £. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,560,000 or £1,000,000. Required: Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would you carry out covered interest arbitrage? What will be your arbitrage profit? Explain how the IRP will be restored as a result of covered arbitrage activities.