A US-Based Investor Enters into an Unhedged Cross-Currency Equity Swap $-$

question 18

Multiple Choice

A US-based investor enters into an unhedged cross-currency equity swap in which he pays returns on the S&P 500 index in dollars in exchange for receiving the returns on the FTSE 100 in pounds. At inception, the notional principal on the swap is $100 million, and the exchange rate is $1.60 = £ 1. Cash flows are exchanged every six months and the first six-month period has 182 days in it. At the end of the first six-month period, the raw returns on the S&P 500 are 8% and the raw returns on the FTSE 100 are 9%. The exchange rate at this point is $1.50 = £ 1. The investor's net cash flow on this first payment date is

• A) \(-\) $1million.
• B) \(+\) 0.165 million.
• C) \(+\) 0.438 million.
• D) \(+\) 1 million.

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Definitions:

Democritus

An ancient Greek philosopher and a central figure in the development of the atomic theory of the universe.

Atoms

The smallest units of matter, consisting of a nucleus surrounded by electrons, which form the basic building blocks of all chemical elements.

Created

Brought into existence; something made or produced by human or artistic effort.

Idealism

The metaphysical view that the mind and its ideas are the ultimate reality.