FRM Part I · FRM Exam Part I · Swaps
A US company has issued fixed-rate EUR bonds and wants its liability to behave like floating-rate USD debt. Which currency swap position achieves this?
The company should receive EUR fixed and pay USD floating. The EUR fixed receipts from the swap fund the coupons on its EUR bonds, so the euro exposure is neutralised. What remains is a payment obligation in USD at a floating rate, which is the desired liability.
- AReceive EUR fixed and pay USD floatingCorrect
- BReceive USD floating and pay EUR fixed
- CReceive EUR fixed and pay USD fixed
- DReceive USD fixed and pay EUR floating
Explanation
The EUR bond coupons are paid by the company, so it should receive EUR fixed from the swap to offset them. The swap should then require it to pay USD floating, which gives a net floating-rate USD liability. The second option adds more EUR fixed payments. The third option leaves a fixed USD liability, not a floating one.
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