Dell Corp. enters into a currency swap with a dealer in which it pays a fixed ra

Question

Dell Corp. enters into a currency swap with a dealer in which it pays a fixed rate in euros, and the dealer pays a fixed rate in U.S. dollars. The notional principals are $600 million and €500 million (equivalent in value at the current exchange rate of $1.2 per euro.) The fixed rates are 4% in dollars and 5.2% in euros. The swap specifies that the two parties exchange the notional principal at the start and at the end of the swap. Payments are made semiannually on the basis of 180/360.

A. Determine the initial exchange of cash that occurs at the start of the swap.

B. Determine the semiannual payments

C. Determine the final exchange of cash that occurs at the end of the swap.

Explanation / Answer

A. initial exchange:

Dell receives 500 million Euros

dealer receives 600 USD

B. semi annual payments = 2% of 600 million = 12 million by dealer

by DELL = 2.6% of 500 = 13 million

C. finally Dell receives 600 mn USD, dealer receives 500 mn euros

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