Explanation:
At the end of every 12-month period, Bell-Con will pay EUR 7 million to Tech-Con (3.5% × EUR 200 million) and Tech-Con will pay USD 7.5 million to Bell-Con (3% × USD 250 million). At the swap's conclusion, the principal amounts are re-exchanged.
(Book 3, Module 46.3, LO 46.j)
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Question 31
Two firms, Bell-Con and Tech-Con, enter into a fixed-for-fixed currency swap, with an agreement to make periodic payments annually. Bell-Con pays 3.5% in euros and receives 3% in U.S. dollars. At the beginning of the swap, Bell-Con pays a principal amount to Tech-Con of USD 250 million, and Tech-Con pays EUR 200 million to Bell-Con. What amounts are exchanged every period, and what happens to the principal amounts at the swap's conclusion?
A
Bell-Con will pay EUR 8.75 million to Tech-Con, Tech-Con will pay USD 6 million to Bell-Con, and there will be no other payments exchanged at swap conclusion.
B
Bell-Con will pay EUR 7 million to Tech-Con, Tech-Con will pay USD 7.5 million to Bell-Con, and the principal amounts will be re-exchanged at swap conclusion.
C
Bell-Con will pay EUR 7 million to Tech-Con, Tech-Con will pay USD 6 million to Bell-Con, and there will be no other payments exchanged at swap conclusion.
D
Bell-Con will pay EUR 8.75 million to Tech-Con, Tech-Con will pay USD 7.5 million to Bell-Con, and the principal amounts will be re-exchanged at swap conclusion.
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