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FRM Part II · FRM Exam Part II · The US Dollar Shortage in Global Banking and the International Policy Response

A foreign central bank draws USD 2,000 million on a Fed swap line when the spot rate is 1.25 USD per EUR (the ECB-style case, local currency EUR). It later reverses the swap 84 days later at the same spot rate, with interest on the dollars at 2.0% per annum on an actual/360 basis. What interest, in USD, does the foreign central bank owe at unwind?

The interest owed is USD 9.33 million. The swap unwinds at the original exchange rate, so only interest accrues: 2,000 million times 2.0% times 84/360. Using a full year would overstate it at 40 million, and using half the days would halve it.

  1. AUSD 9.33 millionCorrect
  2. BUSD 9.20 million
  3. CUSD 40.00 million
  4. DUSD 4.67 million

Explanation

The reversal uses the initial exchange rate, so there is no exchange-rate gain or loss. Interest = 2,000 million × 2.0% × 84/360 = 9.33 million. Using 365 days gives about 9.21, and using 42 days gives 4.67. Using the full-year rate gives 40.

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