Consider a 3-year currency swap with a notional principal of AUD100,000, whereby A receives annual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD). The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year. Calculate the cash flows in year one.
A) B pays A USD2,000
B) A pays B USD2,000
C) B pays A AUD2,000
D) A pays B AUD2,000

Question

Quizplus · Accepted Answer

In the first year, the market exchange rate is 0.9500 (USD/AUD), which means that 1 AUD is worth 0.9500 USD. The notional principal is AUD100,000, so the value of the principal in USD is 100,000 * 0.9500 = USD95,000. The contracted rate is 0.9300 (USD/AUD), which means that A will receive 0.9300 * USD95,000 = AUD90,350 from B. Therefore, B pays A USD2,000.

Consider a 3-Year Currency Swap with a Notional Principal of AUD100,000