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The swap desk at Crédit Lyonnais is quoting the following rates on 5-year swaps: USD: 8.75%...

The swap desk at Crédit Lyonnais is quoting the following rates on 5-year swaps:

USD: 8.75% bid, 8.85% ask

CHF: 5.25% bid, 5.35% ask.

You enter a swap to pay CHF and receive USD. The notional principal is $10M, the payments are annual, and the current exchange rate is CHF 1 == USD 1. What are the cashflows?

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Answer #1
The relevant rate in USD is bid rate since we will receive USD = 8.75%
The relevant rate in CHF is ask rate since we will Pay CHF = 5.35%
Now,since exchange rate between CHF and USD is 1
We can directly calculate annual cashflow = (USD rate-CHF rate)*$10M
Annual cashflow = (8.75%-5.35%)*$10M
Annual cashflow = 3.4%*$10M
Annual cashflow = $0.34 M
We will receive USD 0.34 million annually
If you have any doubt,please ask
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