Suppose ABC Investment Banker Ltd., is quoting swap rates as follows: 7.50 - 7.85 annually against six-month dollar LIBOR for dollars, and 11.00 - 11.30 percent annually against six-month dollar LIBOR for British pound sterling. ABC would enter into a $/£ currency swap in which:
A)it would pay annual fixed-rate dollar payments of 7.5% in return for receiving annual fixed-rate £ payments at 11.3%
B)it will receive annual fixed-rate dollar payments at 7.85% against paying annual fixed-rate £ payments at 11%
C)a and b
D)none of the above

Question

Quizplus · Accepted Answer

Based on the given swap rates, ABC Investment Banker Ltd. would pay annual fixed-rate dollar payments of 7.50% against receiving annual fixed-rate £ payments at 11.30% (Option A). On the other hand, it could also receive annual fixed-rate dollar payments at 7.85% by paying annual fixed-rate £ payments at 11.00% (Option B). Therefore, the best choice for ABC Investment Banker Ltd. would involve entering into both types of currency swaps, and the correct answer is C.