Consider the following currency swap of coupon interest on the following assets:

5 percent (annual coupon) fixed-rate US$1 million bond 5 percent (annual coupon) fixed-rate bond denominated in Swiss francs (SFr)

Spot exchange rate: SFr1.5/US$.

a. What is the face value of the SFr bond if the investments are equivalent at spot rates?

b. What are the realized cash flows, assuming no change in spot exchange rates?

What are the net cash flows on the swap?

c. What are the cash flows if the spot exchange rate falls to SFr0.50/US$? What are the net cash flows on the swap?

d. What are the cash flows if the spot exchange rate rises to SFr2.25/US$? What are the net cash flows on the swap?

e. Describe the underlying cash position that would prompt the FI to hedge by swapping dollars for Swiss francs.