A USBank Agrees to a Swap of Making Fixed-Rate Interest Payments

A U.S.bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million.The current exchange rate is $1.50/£.The interest payments will be exchanged at the end of the year at the prevailing rates.

At the end of year 3,LIBOR rates are 6 percent and the exchange rate is $1.10/£.What is the net payment paid or received in dollars by the U.S.bank?

A) The U.S.bank paid $12 million and received $16.5 million for a net receipt of $4.5 million.
B) The U.S.bank paid $12 million and received $11 million for a net payment of $1 million.
C) The U.S.bank paid $12 million and received $12 million for a net payment of $0 million.
D) The U.S.bank paid $9 million and received $11 million for a net receipt of $2 million.

Correct Answer:

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