The bank at which you work is arranging a 6 year swap for its client who would like to swap Chinese yuan for U.S. dollars. That is, the client would like to be short a CNY swap leg and long a USD swap leg.

a. Your client needs the swap as a hedge. Do they have a USD asset or USD liability? Explain. (1 point)

b. The spot exchange rate is 6.55 USD/CNY (1 USD costs 6.55 CNY). The 6 year swap rates on the USD and CNY legs are 0.25% and 3.85%, respectively. If the notional amount on the CNY leg is 100 million CNY, what is the current value of the CNY leg in USD? (3 points)

c. What is the NPV of the swap today from the perspective of your client? (3 points)

d. After three years (three years left), assume that the USD interest rate has increased to 2% due to in ation arising from the fiscal stimulus in 2021. The exchange rate after one year is 6.22 USD/CNY. What is the value of the swap from the perspective of your client in CNY? (3 points)