After raising C$15 million in floating-rate financing, and subsequently swapping into fixed-rate payments, Canada Goose decides that it would prefer to make its debt service payments in Swiss francs. Canada Goose recently signed a sales contract with a Swiss buyer that will be paying Swiss francs to Canada Goose over the next 4-year period. This would be a natural inflow of Swiss francs for the coming 4 years, and Canada Goose may decide it wishes to match the currency of denomination of the cash flows through a currency swap.

The swap bank quotes the following rates for a 4-year currency swap deals

bid rate ask rate

C$ 5.56% 5.61%

Swiss franc 1.97% 2.01%

Answer:

a) In this currency swap, which currency would Canada Goose pay and which currency it receives? The current spot exchange rate is Sfr0.75/C$. Calculate all principal and interest payments in both currencies for the life of the swap.

b) Suppose that after one year, Canada Goose decides to unwind the swap agreement, because its Swiss sales contract is terminated. If the 3-year fixed rate of interest for francs is now 2%, the 3-year fixed C$ interest rate is now 5.5%, and the spot exchange rate is Sfr0.80/C$, what is the net present value of the swap agreement? Explain the payment obligations of the two parties precisely, that is, who pays whom.