CMA Final · Strategic Financial Management · Swaps
An Indian company has a US$ 5 million loan at 6% fixed on which it pays interest in dollars. It enters a currency swap converting this into a rupee liability at 8% on the rupee principal equivalent at the spot rate of Rs 80/US$. What is the annual rupee interest payable under the swap, ignoring the dollar flows that are offset?
The annual rupee interest is Rs 3.2 crore. The dollar principal of 5 million converts at Rs 80 to Rs 40 crore, and 8% of that is Rs 3.2 crore. The 6% dollar rate is not applied because the dollar flows are offset by the swap.
- ARs 3.2 croreCorrect
- BRs 2.4 crore
- CRs 4.0 crore
- DRs 3.2 lakh
Explanation
Rupee principal = 5 million x 80 = Rs 40 crore. Interest at 8% = Rs 3.2 crore. Rs 2.4 crore uses the 6% dollar rate on rupee principal, a wrong rate.
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