The current U.S. dollar () to Canadian dollar (C) exchange rate is 0.7. In a 1 million currency swap, the party that is entering the swap to hedge existing exposure to C-denominated fixed-rate liability will: A) pay floating in C$. B) receive floating in C$. C) pay C$1,428,571 at the beginning of the swap. D) receive $1 million at the termination of the swap. Your answer: D was incorrect. The correct answer was C) pay C$1,428,571 at the beginning of the swap. The receive-fixed C$ position will pay 1,000,000/0.7 = C$1,428,571 at swap inception (in exchange for $1 million) and get it back at termination. ME: WHY isn’t D correct? in the answer it even says that he will get it back at termination
They are worried about Fixed-Rate-CAD liability and want to hedge it off. So they will enter the SWAP contract as a fixed-rate-CAD-receiver and lock close-out the exposure, but since the contract amount is $1m, they will have to pay 1m/[0.7/CAD] = 0.142857m as contract initiation.
^but won’t they get the $1 million back at termination?
^^ and receive C$1.4m at the termination of the swap not $1mm
Ok, ok… I got it. thanks.
how did you figure they get C$1.4 back at termination?
1 million US$ / 0.7 = 1.4 Canadian $.