Carlton Corporation entered into a three-year cross currency interest rate swap to receive U. S dollars and pay Swiss francs. The notional principal is $10 million. The 3-year swap rates are quoted in the next table: Swiss Franc U. S. dollar
Bid Ask Bid Ask
2.51% 251% 5.72% 5.79%
Assume the current spot exchange rate is S SF1.5/$.
1. How much U. S. dollars will Carlton receive in year 1 as a result of the currency swap?
2. How much Swiss francs will Carlton pay in year 1 as a result of the currency swap?
3. Carlton, however, decided to unwind the swap after one year - thereby having two years left on the settlement costs of unwinding the swap after one year. Assume the current spot exchange rate when the swap is terminated one year later is S = SF1.4650/$, and the Swiss interest rate is 2.00%, and US interest rate is 5.5% at that time. What is the present value of the U. S. dollar cash flows Carlton could have received if the swap contract were not terminated?
4. In the above question where the currency swap contract was terminated after one year, what is the present value of the Swiss franc cash flows Carlton would have paid if the swap contract were not terminated? Assume again the current spot exchange rate when the swap is terminated one year later is S = SF1.4650/$, and the Swiss interest rate is 2.00%, and US interest rate is 5.5% at that time.
5. In the above, what is the settlement payment Carlton has to make if the current exchange rate of S = SF1.4650/$.