Question

Suppose you are a US Firm who entered into a 10 year swap 5 years ago wherein you pay 2% annually on $100M USD and collect 3% on 130M CAD. At the time you entered the swap, the exchange rate was 1.30 CAD/USD.

Currently, the exchange rate is 1.40 CAD/USD and the 5 year USD for CAD swap rates are 0.2% (USD) and 2.2%(CAD) respectively.

Which of the following is false?

Select one:

a. You are glad the CAD fell in value.

b. You are unhappy USD interest rates fell

c. You are glad CAD interest rates fell

d. You want the Canadian dollar to go up in value

Answer 1

In this case I am trying to maximize my return through gaining by returning on appreciation in Canadian dollars because my receivables are in Canadian dollars so I would always be wanting that Canadian dollars appreciates in relation to the American dollars so that there would be lesser payments and more receivables.

I would never be wanting that Canadian Dollar should fall in value because that would mean that I will have lesser receivables in my hands.

Correct answer would be option (A) you are glad that Canadian Dollars fell in value