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

question 7

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:

Interest Owed

The amount of money that is due as interest on a loan or debt.

Repayment Date

The specific date on which a borrower agrees to pay back the principal and/or interest on a loan.

Employees

Individuals hired by a company or organization to perform specific duties in exchange for compensation.

Cut

To reduce or decrease the size, amount, or number of something.