Question 4: Currency Swaps (2/10) Suppose, to build the Guangzhou campus, HKUST has issued a 3-year Chinese Yuan (CNY) bond with a par value of 1M CNY and a 3% yearly coupon rate. HKUST wants to lock in payments in terms of Hong Kong Dollars (HKD). Right now, the exchange rate is So = 1.1 HKD / CNY. The CNY-dominated interest rate is 3% and the HKD-dominated interest rate is 5% (both annual, continuously compounding). (i) How does the bond require HKUST to pay back in terms of CNY? (ii) If HKUST uses fairly priced currency forwards, what are their payments each year in terms of HKD? (iii) Suppose a swap contract allows HKUST to swap the payments of the 3-year CNY bond to payments of a 3-year HKD bond with a par value of $1M and a 9% yearly coupon rate, what are the payments each year in terms of HKD? (iv) Would you prefer to take (ii) or (iii)?