currency swap?
ABC Corp. entered into a currency swap with its bank, providing that ABC borrows $5 million at 10% and swaps for a 12% yen loan. The spot exchange rate is ¥105/$. If interest only is to be repaid on an annual basis, how much does ABC pay annually to the bank?
Answers & Comments
Verified answer
Switch from dollars to Yen
5,000,000 * 105 = 525,000,000
Multiply by interest only
525,000,000 * 0.12 = 63,000,000,Yen paid in interest per year
Or convert to dollars
63,000,000 / 105 = 600,000 dollars paid in interest per year
If they would have stayed with the U.S. Currency they would have only paid 500,000 in interest. Looks like the bank is getting the better deal!!! HA