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Question 20. Currency Swap (20 marks)
A Canadian corporation (ACC) has just entered into a two-year currency swap contract with
Big Dealer Bank (BDB). The swap contract requires ACC to make semi-annual payments in
Canadian dollars (C\$) and receive semi-annual payments in U.S. dollars (US\$). The notional
amount in Canadian dollars is C\$25 million. The accrual period for the swap is 180/360,
assuming 360 days per year. The US\$/C\$ spot exchange rate is 0.77, with the Canadian
dollar being the domestic currency for ACC. The term structures of C\$ LIBOR and US\$ LIBOR
are as follows:
Days
C\$ LIBOR (%)
US\$ LIBOR (%)
180
0.50
0.55
360
0.60
0.65
540
0.65
0.75
720
0.70
0.85
a.
What is the notional amount in U.S. dollars? (1 mark)
b.
Calculate the fixed rates in Canadian and U.S. dollars. (8 marks)
C.
Calculate the first semi-annual payments for the swap if the terms of the swap
specify that ACC receives fixed rates and pays floating rates. (2 marks)
d.
What is the value of the currency swap at the time of contract initiation? (1 mark)
e.
Assume 240 days has passed since the initiation of the currency swap contract. The
new exchange rate is US\$0.85/C\$. Calculate the value of the swap given the
following LIBOR term structures at time 240. (8 marks)
Days
C\$ LIBOR (%)
US\$ LIBOR (%)
120
0.60
0.60
300
0.70
0.65
480
0.80
0.70
660
0.90
0.80

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