Explanation:
Party X exchanged dollars for $1,000,000 \times 0.87 = 870,000€870,000 \times (1 + 0.0375 / 4) = €878,156.25$. Changes in the exchange rate do not affect the swap payments.
(Book 3, Module 46.3, LO 46.j)
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Question 84
Consider a quarterly-pay currency swap where Party X exchanges $1,000,000 with Party Y for euros when the exchange rate is 0.87 euros per 1 dollar. The interest rates are 4% on dollars and 3.75% on euros. On the final settlement date at the termination of the swap, if the exchange rate is 0.90 euros per 1 dollar, Party X must make a payment of:
A
€908,156.
B
€8,156.
C
€878,156.
D
€870,000.
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