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

question 6

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 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 Canadian bank?

• A)The Canadian bank paid $12 million and received $16.5 million for a net receipt of $4.5 million.
• B)The Canadian bank paid $12 million and received $11 million for a net payment of $1 million.
• C)The Canadian bank paid $12 million and received $12 million for a net payment of $0 million.
• D)The Canadian bank paid $9 million and received $11 million for a net receipt of $2 million.
• E)The Canadian bank paid $9 million and received $12 million for a net receipt of $3 million.

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Definitions:

Reactive

Responding to changes or issues as they occur rather than anticipating and preparing for them in advance.

MTBF Distributions

Mean Time Between Failures distributions, a statistical measure used to describe the expected reliability or availability of a system over time.

Infant Mortality

The failure rate early in the life of a product or process.

Normal Distribution

A probability distribution which is even around the mean, indicating that data points closer to the mean occur more frequently than those further away from the mean.