CMA Final · Strategic Financial Management · Swaps
Sundaram Exports has a USD 2 million loan at a floating rate and enters a currency swap with a bank, exchanging principal at the spot rate of Rs 80 per USD at start and re-exchanging at maturity at the same rate. It pays Rs interest at 9% p.a. on the rupee principal and receives USD interest at 5% p.a. on USD principal. What is the annual rupee interest Sundaram pays under the swap?
Sundaram pays Rs 14.4 million a year. The rupee principal is USD 2 million at Rs 80, or Rs 160 million, and 9% interest on that amount equals Rs 14.4 million annually.
- ARs 14.4 millionCorrect
- BRs 8.0 million
- CRs 7.2 million
- DRs 16.0 million
Explanation
Rupee principal = 2 million x 80 = Rs 160 million. Interest at 9% = Rs 14.4 million per year. Rs 8.0 million would be the USD interest (5% of 160 million) wrongly converted, so it uses the wrong rate.
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