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Question
Bank USA has fixed-rate assets of $50 million funded by fixed-rate liabilities of 75 million Euros paying an interest rate of 10 percent annually. Bank Dresdner has fixed-rate assets of 75 million funded by fixed-rate liabilities of $50 million paying an interest rate of 10 percent annually. The current exchange rate is 1.50/$. They agree to swap interest payments on their liabilities to hedge against currency risk exposure for two years.
The transaction each year consists of
A. Bank USA swaps a payment of $5 million per year for Bank Dresdner's payment of 7.5 million to make interest payments on each other's debt.
B. Bank USA swaps a payment of €6 million per year for Bank Dresdner's payment of $4 million to make interest payments on each other's debt.
C. Bank USA swaps a payment of $6 million per year for Bank Dresdner's payment of 6 million to make interest payments on each other's debt.
D. Bank USA swaps a payment of €6 million per year for Bank Dresdner's payment of $6 million to make interest payments on each other's debt.
E. Bank USA swaps a payment of $4 million per year for Bank Dresdner's payment of 4 million to make interest payments on each other's debt.
Answer
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