Suppose that you are a swap bank and you notice that interest rates on coupon bonds are as shown.Develop the 3-year bid price of a euro swap quoted against flat USD LIBOR.The current spot exchange rate is $1.50 per €1.00.The size of the swap is €40 million versus $60 million. $\begin{array}{ll}
\text { Rates } & \text { 3-year } \
\text { USD } & \$ 7 \% \
\text { Euro } & € 5 \%
\end{array}$ In other words,what will you be willing to pay in euro against receiving USD LIBOR?
A)7 percent
B)6 percent
C)5 percent
D)none of the options

Question

Quizplus · Accepted Answer

The swap bank will be willing to pay the euro interest rate of 5% to receive USD LIBOR, as the euro interest rate is the cost of borrowing in euros.

Suppose That You Are a Swap Bank and You Notice Rates 3-year USD $7% Euro €5%\begin{array}{ll}\text { Rates } & \text { 3-year } \\\text { USD } & \$ 7 \% \\\text { Euro } & € 5 \%\end{array} Rates USD Euro ​ 3-year $7%€5%​

Suppose That You Are a Swap Bank and You Notice $\begin{array}{ll}\text { Rates } & \text { 3-year } \\\text { USD } & \$ 7 \% \\\text { Euro } & € 5 \%\end{array}$