A USBank Agrees to a Swap of Making Fixed-Rate Interest Payments

question 11

Multiple Choice

A U.S.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 the year,LIBOR is 4 percent and the exchange rate is $1.50/£.What is the net payment paid or received in dollars by the U.S.bank?

• A)The U.S.bank paid $12 million and received $8 million for a net payment of $4 million.
• B)The U.S.bank paid $12 million and received $10 million for a net payment of $2 million.
• C)The U.S.bank paid $12 million and received $12 million for a net receipt of $0 million.
• D)The U.S.bank paid $12 million and received $14 million for a net receipt of $2 million.

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