Question #74 - Reading 30 Pricing and Valuation of Forward Commitments

Reading: Reading 30 Pricing and Valuation of Forward Commitments

PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf

Page: 31

Status: Unattempted

Correct Answer: B

Shared Context

- Using the price and predicted MRR rates in Exhibit 1, which of the following is closest to the predicted value of the FRA at the year end? A) –$100,000 B) –-$85,000 C) –$62,000

Question

Which of the following statements regarding cash flows at the final settlement date for the currency swap outlined in Exhibit 2is most likely correct?

Answer Choices:

A. Without knowing the spot rates on the final settlement date, it is impossible to state the cash flows that occur

B. Sam Smith Inc. will receive USD 40,000,000 plus the USD interest payment

C. Sam Smith will pay USD 40,000,000 and receive the final USD interest payment

Explanation

Smith initially borrowed EUR and swapped USD. Throughout the swap, at each settlement date Smith will pay EUR interest and receive USD. At the final settlement date, Smith will receive the final USD interest payment and receive the USD principal back.

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