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FRM Part I · FRM Exam Part I · Swaps

A company enters a 3-year annual-pay fixed-for-fixed currency swap in which it pays 4% on a USD principal of 50 million and receives 3% on a EUR principal of 45 million. Principals are exchanged at inception and re-exchanged at maturity. What are the company's cash flows on the final payment date?

On the last date the company pays USD 52 million, being the 2 million coupon plus the 50 million principal, and receives EUR 46.35 million, being the 1.35 million coupon plus the 45 million principal. Principals are re-exchanged at maturity along with the final interest.

  1. APay USD 52.0 million; receive EUR 46.35 millionCorrect
  2. BPay USD 2.0 million; receive EUR 1.35 million
  3. CPay USD 52.0 million; receive EUR 45.0 million
  4. DPay USD 50.0 million; receive EUR 46.35 million

Explanation

Final USD payment = 50 x 4% + 50 = 2.0 + 50 = 52.0 million. Final EUR receipt = 45 x 3% + 45 = 1.35 + 45 = 46.35 million. Choosing 2.0/1.35 omits the principal re-exchange, a key feature of currency swaps.

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