Question

A US company enters into a currency swap in which pays a fixed rate of 5.5% in euros and the counterparty pays a fixed rate of 6.75% in dollars. The notional principals are $100,000,000 and €116,500,000 million. Payments are made semi-annually and on the basis of 30 days per month and 360 days per year.

Calculate the initial exchange of payments that the US company pays to the counterparty.

Answer 1

Sol:

Notional principal = $100,000,000 and €116,500,000

Payment terms = Semi-annually and on the basis of 30 days per month and 360 days per year.

To calculate the initial exchange of payments that the US company pays to the counterparty:

When the currency swap is initiated principal value is exchange between the counterparty involved. US company will give $100,000,000 to the counterparty and the counterparty will give €116,500,000 to the US company.

Therefore initial exchange of payments that the US company pays to the counterparty will be $100,000,000 or in other term $100 million for €116,500,000 or in other term €116.5 million.