Financial Risk Manager Part 1
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A currency derivatives trader at a hedge fund is describing the mechanics of currency swaps to a group of junior analysts. The trader uses an example of a fixed-for-fixed USD for CNY currency swap with the following terms:
Notional amount in USD: USD 10 million
Notional amount in CNY: CNY 65 million
Interest rate in USD: 1.0%
Interest rate in CNY: 2.5%
Time to maturity: 4 years
Frequency of interest payments: Annual
Assuming the hedge fund receives interest in CNY, which of the following conclusions would the analysts find to be most likely correct?
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 decrease.