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:

Resellers

Businesses or individuals that buy products or services with the intention of selling them rather than consuming or using them.

Institutional Buyers

Organizations that purchase goods and services in large volumes for operational purposes, not for individual consumption.

Purchasing Agents

Individuals or companies responsible for acquiring goods or services for their own use or for resale.

System

A set of interrelated components that work together to achieve a specific goal or function, organized within a framework or structure.