ABC,a US-Based Corporation Enters into a Currency Basis Swap with XYZ,a

question 6

Multiple Choice

ABC,a US-based corporation enters into a currency basis swap with XYZ,a British company,in which the initial principal amounts are $200 million and $£$ 100 million.That is: -At inception,there is an initial principal exchange in which ABC pays XYZ $200 million and receives
-- $£$ --100 million.
-Subsequently,at each interest payment date ABC pays XYZ the GBP-Libor rate on
-- $£$ --100 million,and receives the USD-Libor rate on $200 million.
-Fnally,at maturity,a re-exchange of principals occurs in which ABC pays XYZ
-- $£$ --100 million in exchange for $200 million.
Suppose the spot exchange rate is $1.55 = $£$ 1 at the time of entering into the swap.Assuming ABC and XYZ both have AA credit ratings at this time and can access funds at Libor flat,the value of the swap at inception to ABC is

• A)Positive.
• B)Zero.
• C)Negative.
• D)Cannot be determined from the given information.

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Definitions:

Standards

Ideas (concepts) of how things might possibly be.

Self-Consciousness

An acute awareness of oneself, often reflected in concern about how one is perceived by others.

Self-Regulation

The ability to manage and adjust one's emotions, behaviors, and desires in the face of external demands or challenges.

Self-Handicapping

Putting obstacles in the way of one’s own performance so that anticipated or possible failure can be blamed on the obstacle instead of on lack of ability.