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 year 3, LIBOR rates are 6 percent and the exchange rate is $1.10/£. 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 $16.5 million for a net receipt of $4.5 million.
B)The U.S.bank paid $12 million and received $11 million for a net payment of $1 million.
C)The U.S.bank paid $12 million and received $12 million for a net payment of $0 million.
D)The U.S.bank paid $9 million and received $11 million for a net receipt of $2 million.
E)The U.S.bank paid $9 million and received $12 million for a net receipt of $3 million.

Question

Quizplus · Accepted Answer

The U.S. bank pays $12 million in fixed-rate payments. The UK bank pays floating-rate payments of LIBOR (6%) + 4% = 10% on £100 million, which is £10 million. At the exchange rate of $1.10/£, this is $11 million. The net payment is $12 million - $11 million = $1 million paid by the U.S. bank.

A US Bank Agrees to a Swap of Making Fixed-Rate Interest