Topics: United States dollar, Currency, Exchange rate Pages: 4 (1105 words) Published: May 8, 2013
Version A Fin 536 Quiz 4 Solutions Name_______________ Section_4pm/7pm Use the following table of swap quotes when you need it.

Years 1 2 3 4 5

Euro Bid 2.99 3.08 3.24 3.44 3.63

Ask 3.02 3.12 3.28 3.48 3.67

Swiss franc Bid Ask 1.43 1.47 1.68 1.76 1.93 2.01 2.15 2.23 2.35 2.43

U. S. dollar Bid Ask 5.24 5.26 5.43 5.46 5.56 5.59 5.71 5.74 5.79 5.83

Japanese yen Bid Ask 0.23 0.26 0.36 0.39 0.56 0.59 0.82 0.85 1.15 1.18

1. (Fill out the answers, 7 pts) a. (Motivation of Interest rate swap) Caterpillar Inc has issued $200m Euro-dollar bonds. The coupon rate of these bonds is equal to Libor plus 1.5%. Coupons are paid annually. The company will lose if the interest rate (Libor) ____rises___(rises/drops). It is considering hedging risk in the coupon payments with a three-year interest rate swap. It should be paying ___fixed______(floating/fixed) rate interest in the swap deal. b. (Currency swap) A company enters a 2-year currency swap paying fixed rate on euros and receiving fixed rate on Swiss Francs every 12 months, then the company will ____gain____ (lose/gain) if the interest rate (Libor) on euros increases; will ____lose_______ (lose/gain) if the interest rate (Libor) on Swiss Francs increases; and will _____lose______ (lose/gain) if the euro appreciate against the Swiss Franc, c. (Swap quotes)A company enters a 4-year interest rate swap on U.S dollars, receiving fixed rate and paying Libor every 12 months, then the company will pay a ___5.71____% fixed rate every 12 months. (Use the swap quotes table). It will _____lose___(lose/gain) if interest rate (Libor) on dollars rises. d. (Swap quotes)A company enters a 5-year currency swap, receiving fixed rate on Japanese yen and paying fixed rate on dollars every 12 months, then the company will receive a ____1.15____% fixed rate on yens and pay a _____5.83____% fixed rate on euros. (Use the swap quotes table). e. (Discount Cash Flows)Based on the asset market (pricing) approach, the current spot rate...
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