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Answer: The hedge fund will pay CNY 65 million and receive USD 10 million at the initiation of the swap.
The correct answer to the question is B. This is because, in a currency swap, the notional amounts are exchanged at the initiation of the swap in the opposite direction from the interest rate payments. Since the hedge fund is receiving interest in CNY, it will pay out CNY 65 million and receive USD 10 million at the start of the swap. The other options are incorrect for the following reasons: - Option A is incorrect because, unlike an interest rate swap, the principal amounts in a currency swap are indeed exchanged at the initiation. - Option C is incorrect as the swap typically has a zero mark-to-market value upon initiation, meaning there is no immediate gain or loss recognized at the start. - Option D is incorrect because if the CNY depreciates against the USD over the life of the swap, the hedge fund would receive less CNY when it has to pay back USD at the end of the swap. This would result in a decrease in the mark-to-market value of the swap for the hedge fund, as they would effectively be paying back more USD for the same amount of CNY received initially.
Author: LeetQuiz Editorial Team
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A hedge fund's currency derivatives expert is providing an in-depth explanation of currency swaps to a group of junior analysts. To illustrate the concept, they use a fixed-for-fixed currency swap between the US dollar (USD) and the Chinese yuan (CNY) with the following specific terms:
Given that the hedge fund will be receiving interest payments in CNY, which of the following conclusions would the analysts most likely find accurate?
A
Interest payments will be exchanged periodically for the duration of the swap, but the notional amounts will not be exchanged.
B
The hedge fund will pay CNY 65 million and receive USD 10 million at the initiation of the swap.
C
The swap is structured to have a positive mark-to-market value for the hedge fund at the initiation of the swap.
D
Holding all else constant, if the CNY depreciates against the USD, the mark-to-market value of the swap will increase for the hedge fund.
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