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You are owed CAD 500,000 in one year, but you would prefer dollars. You are considering using a currency swap to eliminate your exchange rate
You are owed CAD 500,000 in one year, but you would prefer dollars. You are considering using a currency swap to eliminate your exchange rate risk, which will pay off one year from today. The fixed leg of this swap uses a rate of USD 0.80 per CAD, and the variable leg will use the spot rate at maturity.
3A. What should the notional asset be for this swap?
3B. Which leg of the swap should you take?
3C. If you use the swap, what will your total cash flows be one year from today, including both the swap and the preexisting CAD exposure?
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