Explanation:
A pay-fixed EUR, receive-fixed GBP currency swap can be viewed as:
Key calculations:
Therefore, the swap is equivalent to:
Why not option A? Option A uses the forward rate (0.85) to calculate GBP notional, but currency swaps use the spot rate at initiation for notional calculations.
Why not option C? Option C reverses the positions (long EUR, short GBP), which would be the opposite of a pay-fixed EUR, receive-fixed GBP swap.
Ultimate access to all questions.
An analyst gathers the following information about the GBP/EUR (amount of GBP per 1 EUR) exchange rate:
Entering into an at-market 5-year pay-fixed EUR, receive-fixed GBP currency swap with a notional of EUR 1,000 is equivalent to:
A
short-selling a EUR 1,000 par value fixed-rate bond and purchasing a GBP 850 par value fixed-rate bond.
B
short-selling a EUR 1,000 par value fixed-rate bond and purchasing a GBP 900 par value fixed-rate bond.
C
purchasing a EUR 1,000 par value fixed-rate bond and short-selling a GBP 900 par value fixed-rate bond.
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