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:

Miller-Orr Model

The Miller-Orr Model is a financial model used to manage cash balances by setting upper and lower limits on cash reserves, suggesting when to transfer funds to minimize costs.

Lower Limit

The minimum value or boundary that a variable, such as a stock price or interest rate, can reach or be set to.

Upper Limit

The highest value that a variable can assume in a given context or the maximum capacity of a system.

BAT Model

The BAT Model, or Behaviorally Anchored Rating Scale, is a method used in performance management to rate and evaluate employees' behaviors against specific examples that are anchored to numerical ratings.