Consider a 3-year annual currency swap that takes place between a foreign firm (FF) with FC currency units and a U.S. rm (USF) with $ currency units. USF is the xed-rate payer and FF is the oating-rate payer. The xed interest rate at the initiation of the swap is 7%, and 9% at the end of the swap. The variable rate is 5% currently; 6% at the end of year 1; 8% at the end of year 2; and 7% at the end of year 3. At the beginning of the swap, $1.0 million is exchanged at an exchange rate of FC2.0 = $1.0. At the end of the swap period, the exchange rate is FC1.5 = $1.0.

Note: With this currency swap, end-of-period payments are based on beginning-of-period interest rates.

At the end of year 2:

Select one:

a. USF pays USD70,000; FF pays FC60,000

b. USF pays USD60,000; FF pays FC140,000

c. USF pays FC60,000; FF pays $70,000

d. USF pays FC140,000; FF pays $60,000