Question

consider 5-year fixed-for-fixed currency swap agreement between Shell and BP. Under the contract BP pays a fixed rate of interest of 5% in sterling and receives a fixed rate of interest of 4% in dollars from BP. Interest rate payments are made once a year and principal amounts of $15 million and £10 million. which of the following is FALSE?

A. at outset, Shell pays $15 million and receives £10 million

B. each year Shell receives $0.6 million and pays £0.5 million

C. each year BP receives $0.5 million and pays £0.6 million

D. at the end, Shell pays $10 million and receives £15 million

E. last year Shell receives £10.70 million and pays $15.60 million

Answer 1

C is wrong ,

As it currency swap which means that BP & shell hass exchanged there obligations i.e BP orginally was to borrow sterling of 10 million higher rate than 5 % and on same ground shell was orginally was to borrow 15 million $ @ higher rate than 4 %.

Rather than borrowing as per there orginal suitation they have entered into curreny swap i.e BP will borrow $15 million @ 4% and Shell will borrow sterling 10 million @ 5%.

They will settle there obligation st the end of 5 year.