Americana Bank has $200 million of excess funds and Britannia Bank has £100 million of excess funds in pound sterling.The spot exchange rate S A is $2 per pound sterling.They enter into a currency swap today that has a tenor of two months.The annual risk-free simple interest rates are i = 4 percent in the United States and i E = 5 percent in the United Kingdom.Cash flows are exchanged at the end of each month.
-The currency swap begins today with:

Question

Quizplus · Accepted Answer

Americana Bank will pay $200 million to Britannia Bank and receive £100 million in return. This is because the excess funds of Americana Bank are in USD while the excess funds of Britannia Bank are in pounds. The spot exchange rate is $2 per pound sterling, so $200 million can be exchanged for £100 million. The currency swap has notional principal, so no exchange of cash flows takes place today. The cash flows will be exchanged at the end of each month for the tenor of two months. The annual simple interest rates are also given, but they are not relevant for determining the initial exchange of cash flows.

Americana Bank Has $200 Million of Excess Funds and Britannia