Consider a 3-year currency swap with a notional principal of AUD100,000, whereby A receives bannual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD). The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year. Calculate the cash flows in year three.
A) B pays A USD4,000
B) A pays B USD4,000
C) B pays A AUD4,000
D) A pays B AUD4,000

Question

Quizplus · Accepted Answer

In year three, the exchange rate is 0.8900 USD/AUD. The contracted rate is 0.9300 USD/AUD. A pays B the difference in the exchange rate: (0.9300 - 0.8900) * 100,000 = USD4,000.

Consider a 3-Year Currency Swap with a Notional Principal of AUD100,000