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Question
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.
Answer
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