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3. (15 points) Swaps: Firm A enters a three-year Swiss franc (CHF) - US dollar (USD) currency swap with a notional value of USD100M. The

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3. (15 points) Swaps: Firm A enters a three-year Swiss franc (CHF) - US dollar (USD) currency swap with a notional value of USD100M. The current spot exchange rate is USD1 = CHF0.90. At initiation of the swap the firm receives CHF and pays USD. The US dollar interest rate for the 3 year swap is 6 month LIBOR and the Swiss franc interest rate for the swap is 1.2% fixed (APR). Each firm makes semi-annual (twice a year) interest payments. a. (5 pts) Draw a diagram of the cash inflows and outflows of this swap for Firm A. Assume the cash flows occur at the end of each period. Label the amounts and be clear as to paying or receiving. b. (3 pts) One year later, after the second semi-annual interest payments, interest rates and exchange rates have changed. The spot exchange rate is now USD1 = CHF0.95 and the CHF interest rate for a new two-year swap is 1.0% (APR) versus USD LIBOR. As a result of these changes, discuss whether the current value of the swap has increased or decreased from the perspective of Firm A. c. pts) Determine the value of the swap to Firm A at this point (one year after origination, immediately after the second semi-annual interest payments) in USD terms. 3. (15 points) Swaps: Firm A enters a three-year Swiss franc (CHF) - US dollar (USD) currency swap with a notional value of USD100M. The current spot exchange rate is USD1 = CHF0.90. At initiation of the swap the firm receives CHF and pays USD. The US dollar interest rate for the 3 year swap is 6 month LIBOR and the Swiss franc interest rate for the swap is 1.2% fixed (APR). Each firm makes semi-annual (twice a year) interest payments. a. (5 pts) Draw a diagram of the cash inflows and outflows of this swap for Firm A. Assume the cash flows occur at the end of each period. Label the amounts and be clear as to paying or receiving. b. (3 pts) One year later, after the second semi-annual interest payments, interest rates and exchange rates have changed. The spot exchange rate is now USD1 = CHF0.95 and the CHF interest rate for a new two-year swap is 1.0% (APR) versus USD LIBOR. As a result of these changes, discuss whether the current value of the swap has increased or decreased from the perspective of Firm A. c. pts) Determine the value of the swap to Firm A at this point (one year after origination, immediately after the second semi-annual interest payments) in USD terms

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