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Suppose that the British pound interest rate is 0.65% per annum and Canadian dollar interest rate is 1% per annum for all maturities, annually compounded. The current exchange rate is 1.6033 CAD/£. Under the terms of a swap agreement, a bank receives 2% per annum in Canadian dollars and pays 3% per annum in British pounds. Payments are exchanged every year, with one exchange having just taken place. The principal amounts are $10 million Canadian dollars and $6 million British pounds. The swap will last two more years.

a. Determine the cash flows to the bank.

Basic Finance, Finance

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