Suppose that the British pound interest rate is 0.65% per annum and Canadian dollar interest rate is 1% per annum for all maturities, annually compounded. The current exchange rate is 1.6033 CAD/. Under the terms of a swap agreement, a bank receives 2% per annum in Canadian dollars and pays 3% per annum in British pounds. Payments are exchanged every year, with one exchange having just taken place. The principal amounts are $10 million Canadian dollars and $6 million British pounds. The swap will last two more years.

Determine the cash flows to the bank. (4 marks)

What is the value of the swap to the bank in terms of Canadian dolalrs