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Assume Carlton enters into a three-year fixed-for-fixed swap agreement to receive Swiss Franc and pay U.S. dollar annually, on a notional amount of $6,000,000. The

Assume Carlton enters into a three-year fixed-for-fixed swap agreement to receive Swiss Franc and pay U.S. dollar annually, on a notional amount of $6,000,000. The spot exchange rate at the time of the swap is SF0.8/$. Assume that one year into the swap agreement Carlton decides it wishes to unwind the swap agreement and settle it in dollars. Assuming that a two-year fixed rate of interest on the Swiss franc is now 2.59%, and a two-year fixed rate of interest on the dollar is now 5.90%, and the spot rate of exchange is now SF0.85/$, what is the net present value of the swap agreement? Who pays whom what?

Euro-

Swiss franc

U. S. dollar

Japanese yen

Years

Bid

Ask

Bid

Ask

Bid

Ask

Bid

Ask

2

3.08

3.12

1.68

1.76

5.43

5.46

0.45

0.49

3

3.25

3.29

2.12

2.17

5.54

5.59

0.56

0.59

Select one:

a. The NPV of the Swap to Carlton is -$369,881.31. Carlton pays the dealer the amount of NPV.

b. The NPV is zero. No one pays.

c. The NPV of the Swap to Carlton is $314,399.11. The dealer pays Carlton the amount of NPV.

d. The NPV of the Swap to Carlton is $369,881.31. The dealer pays Carlton the amount of NPV.

e. The NPV of the Swap to Carlton is -$314,399.11. Carlton pays the dealer the amount of NPV.

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