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FRM Part I · FRM Exam Part I · Swaps

A company enters a three-year fixed-for-fixed currency swap with annual payments. It pays 3% on EUR 20 million and receives 5% on USD 22 million. Principals are exchanged at initiation and again at maturity at the initial exchange rate. What are the company's cash flows on the final payment date?

On the final date the company receives USD 23.1 million and pays EUR 20.6 million. Each leg combines the last interest payment with the return of principal: USD 22 million plus 5% interest, and EUR 20 million plus 3% interest. The payments are in different currencies, so they are not netted.

  1. AReceive USD 23.1 million and pay EUR 20.6 millionCorrect
  2. BReceive USD 1.1 million and pay EUR 0.6 million
  3. CReceive USD 22.0 million and pay EUR 20.0 million
  4. DReceive USD 23.1 million and pay EUR 20.0 million

Explanation

The final-year USD interest is 5% × 22 = 1.1m, so the company receives 22 + 1.1 = USD 23.1m. The final-year EUR interest is 3% × 20 = 0.6m, so it pays 20 + 0.6 = EUR 20.6m. The second option omits the principal re-exchange. The fourth option omits the EUR interest.

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