Question #6
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 3
Status: Unattempted
Question
The current U.S. dollar ($) to Canadian dollar (C$) exchange rate is 0.7. In a $1 million currency swap, the party that is entering the swap to hedge existing exposure to C$- denominated fixed-rate liability will:
Answer Choices:
A. pay C$1,428,571 at the beginning of the swap
B. pay floating in C$
C. receive floating in C$
Explanation
The party that is entering the swap to hedge existing exposure to C$-denominated fixed-
rate liability will want to receive-fixed C$. They will pay 1,000,000/0.7 = C$1,428,571
(principal) at swap inception (in exchange for USD 1 million) and get the same amount
(C$1,428,571) back at termination (in exchange for paying back the USD 1 million).
(Module 30.7, LOS 30.f)
Typesetting math: 100%