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FRM Part I · FRM Exam Part I · Swaps

A company enters a three-year currency swap with annual payments. It receives USD interest at 5% on USD 30 million and pays EUR interest at 3% on EUR 25 million, with principals re-exchanged at maturity. What are the company's cash flows on the final payment date?

On the last date the company receives USD 31.5 million, which is the USD 30 million principal plus 5% interest. It pays EUR 25.75 million, the EUR 25 million principal plus 3% interest, because both principals are re-exchanged at maturity along with the final coupons.

  1. AReceive USD 31.5 million and pay EUR 25.75 millionCorrect
  2. BReceive USD 1.5 million and pay EUR 0.75 million
  3. CReceive USD 30.0 million and pay EUR 25.0 million
  4. DReceive USD 31.5 million and pay EUR 26.5 million

Explanation

On the final date the company receives USD 30m × 1.05 = USD 31.5m (interest plus principal). It pays EUR 25m × 1.03 = EUR 25.75m. The interest-only option omits the final principal exchange. The 30/25 option omits the interest. The EUR 26.5m option applies the USD 5% rate to the EUR principal.

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