A Canadian Bank Agrees to a Swap of Making Fixed-Rate

question 26

Multiple Choice

A Canadian 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 2, LIBOR rates are 6 percent and the exchange rate is $1.50/£. What is the net payment paid or received in dollars by the Canadian bank?

• A)The Canadian bank paid $9 million and received $9 million for a net payment of $0 million.
• B)The Canadian bank paid $9 million and received $15 million for a net receipt of $6 million.
• C)The Canadian bank paid $12 million and received $9 million for a net payment of $3 million.
• D)The Canadian bank paid $12 million and received $12 million for a net payment of $0 million.
• E)The Canadian bank paid $12 million and received $15 million for a net receipt of $3 million.

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Definitions:

Genetic Drift

Change in allele frequency due to chance alone.

Random Mating

A mating system where all individuals within a population have an equal chance of mating with each other, leading to genetic diversity.

Artificial Selection

The process by which humans breed plants or animals for particular genetic characteristics.

Directional Selection

Mode of natural selection in which forms of a trait at one end of a range of variation are adaptive.