Question 2. Currency Swap (20 marks) A Canadian corporation (ACC) has just entered into a two-year currency swap contract with Big Dealer Bank (BDB). The swap contract requires ACC to make semi-annual payments in Canadian dollars (C$) and receive semi-annual payments in U.S. dollars (US$). The notional amount in Canadian dollars is C$25 million. The accrual period for the swap is 180/360, assuming 360 days per year. The US$/C$ spot exchange rate is 0.77, with the Canadian dollar being the domestic currency for ACC. The term structures of C$ LIBOR and US$ LIBOR are as follows: Days 180 360 C$ LIBOR (%) 0.50 0.60 0.65 US$ LIBOR (%) 0.55 0.65 0.75 0.85 540 720 0.70 a. What is the notional amount in U.S. dollars? (1 mark) Calculate the fixed rates in Canadian and U.S. dollars. (8 marks) b. c. d. Calculate the first semi-annual payments for the swap if the terms of the swap specify that ACC receives fixed rates and pays floating rates. (2 marks) What is the value of the currency swap at the time of contract initiation? (1 mark) Assume 240 days has passed since the initiation of the currency swap contract. The new exchange rate is US$0.85/C$. Assume that, on Day 180, the 180-day C$ and U.S.$ LIBORs remained the same, at 0.5% and 0.55%, respectively. Calculate the value of the swap given the following LIBOR term structures at time 240. (8 marks) e. Days 120 C$ LIBOR (%) US$ LIBOR (%) 0.60 0.60 0.70 0.65 0.80 0.70 300 480 660 0.90 0.80 Question 2. Currency Swap (20 marks) A Canadian corporation (ACC) has just entered into a two-year currency swap contract with Big Dealer Bank (BDB). The swap contract requires ACC to make semi-annual payments in Canadian dollars (C$) and receive semi-annual payments in U.S. dollars (US$). The notional amount in Canadian dollars is C$25 million. The accrual period for the swap is 180/360, assuming 360 days per year. The US$/C$ spot exchange rate is 0.77, with the Canadian dollar being the domestic currency for ACC. The term structures of C$ LIBOR and US$ LIBOR are as follows: Days 180 360 C$ LIBOR (%) 0.50 0.60 0.65 US$ LIBOR (%) 0.55 0.65 0.75 0.85 540 720 0.70 a. What is the notional amount in U.S. dollars? (1 mark) Calculate the fixed rates in Canadian and U.S. dollars. (8 marks) b. c. d. Calculate the first semi-annual payments for the swap if the terms of the swap specify that ACC receives fixed rates and pays floating rates. (2 marks) What is the value of the currency swap at the time of contract initiation? (1 mark) Assume 240 days has passed since the initiation of the currency swap contract. The new exchange rate is US$0.85/C$. Assume that, on Day 180, the 180-day C$ and U.S.$ LIBORs remained the same, at 0.5% and 0.55%, respectively. Calculate the value of the swap given the following LIBOR term structures at time 240. (8 marks) e. Days 120 C$ LIBOR (%) US$ LIBOR (%) 0.60 0.60 0.70 0.65 0.80 0.70 300 480 660 0.90 0.80
