A Canadian 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 Canadian bank?

Question

Quizplus · Accepted Answer

The Canadian bank pays $12 million in fixed-rate payments. The floating-rate payment received is LIBOR (4%) + 4% = 8% of £100 million, which is £8 million. Converting £8 million to dollars at the exchange rate of $1.50/£ gives $12 million. Thus, the net payment is $12 million paid and $12 million received, resulting in a net receipt of $0 million.

A Canadian Bank Agrees to a Swap of Making Fixed-Rate