A U.S.bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million.The current exchange rate is $1.50/£.The interest payments will be exchanged at the end of the year at the prevailing rates. At the end of the year, LIBOR is 4 percent and the exchange rate is $1.50/£.What is the net payment paid or received in dollars by the U.S.bank?
A)The U.S.bank paid $12 million and received $8 million for a net payment of $4 million.
B)The U.S.bank paid $12 million and received $10 million for a net payment of $2 million.
C)The U.S.bank paid $12 million and received $12 million for a net receipt of $0 million.
D)The U.S.bank paid $12 million and received $14 million for a net receipt of $2 million.
E)The U.S.bank paid $12 million and received $16 million for a net receipt of $4 million.

Question

Quizplus · Accepted Answer

The U.S. bank makes fixed-rate payments of $12 million. The floating-rate payment it receives is based on LIBOR + 4%, which is 8% of £100 million. This equals £8 million. At the exchange rate of $1.50/£, the U.S. bank receives $12 million (1.50 * £8 million). Therefore, the net payment is $0 million, as the bank pays and receives the same amount.

A USBank Agrees to a Swap of Making Fixed-Rate Interest Payments