A Dollar-Swiss Franc Swap with a Maturity of Five Years

question 22

Essay

A dollar-Swiss franc swap with a maturity of five years was contracted by Papaf Inc. three years ago. Papaf swapped $100 million for CHF 250 million. The swap payments were annual, based on market interest rates of 8% in dollars and 4% in CHF. In other words, Papaf Inc. contracted to pay dollars and receive CHF. The current spot exchange rate is 2 CHF/$, and the current interest rates are 6% in CHF and 10% in $ (the term structures are flat).
a. What is the swap payment at the end of year three? Does Papaf pay or receive?
b. On the final date of the swap, the spot exchange rate is 1.5 CHF/$.
What is the final swap payment at the end of year five?

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