6

1. Consider a U.S. company that enters into a currency swap with a dealer to pay a fixed rate on euros. The notional principal is $10,000,000. The domestic interest rate is 6.25% in dollars, and the foreign interest rate is 5.5% in euros. Assume an exchange rate of 1.25/$ Calculate the initial exchange of principal and identify the amounts paid by each party.

   		U.S. company pays $10,000,000 and dealer pays $10,000,000.
   		U.S. company pays $10,000,000 and dealer pays 12,500,000.
   		U.S. company pays 12,500,000 and dealer pays 12,500,000.
   		U.S. company pays 12,500,000 and dealer pays $10,000,000.

Question 9

1. ARCO wishes to obtain a loan denominated in Swiss francs but considers the U.S. market to offer better terms. How can ARCO accomplish this?

   		Borrow francs in Switzerland, exchange for dollars and arrange an interest-rate swap.
   		Borrow francs in Switzerland, exchange for dollars and arrange a currency swap.
   		Borrow dollars in U.S., exchange for francs and arrange a currency swap.
   		Borrow dollars in U.S., exchange for francs and arrange an interest-rate swap.

1 points

Question 10

1. Firm A is paying $750,000 in interest payments a year while Firm B is paying LIBOR plus 75 basis points on $10,000,000 loans. The current LIBOR rate is 6.5%. Firm A and B have agreed to swap interest payments. What is the net payment this year?

   		Firm A pays $750,000 to Firm B
   		Firm A pays $25,000 to Firm B
   		Firm B pays $25,000 to Firm A
   		Firm B pays $725,000 to Firm A