Question #44
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 18
Status: Unattempted
Correct Answer: A
Question
A U.S. firm (U.S.) and a foreign firm (F) engage in a 3-year, annual pay currency swap; The USD fixed rate at initiation was 5% while FC fixed rate was 4%. At the beginning of the swap, $2 million was paid by the U.S. firm and the exchange rate was 2 FC units per $1. At the end of the swap period the exchange rate was 1.75 FC units per $1. At the end of year 1, firm:
Answer Choices:
A. U.S. pays firm F 160,000 FC units
B. F pays firm U.S. $200,000
C. U.S. pays firm F $200,000
Explanation
Firm U.S. pays fixed 4% on FC = 0.04 × $2,000,000 × 2 FC units per $1 = 160,000 FC units.