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Dear John
question 1: Can i said there 2 types of currency swaps: “A” and “B”?
“A” is in question (a) and (b) (i);
Borrow for counter party, pay interest for counter party; in the end pay up own loan agreement;
This swap always comes with an Interest rate swap inside;
Discussion and calculation here has Nothing to do with $5000m investment amount or NPV of project.
Amount is Not Fixed due to interest may be floating or fixed, and borrowing amount unkonwn;
Period is the loan period;
No FX rate fixed as well due to no need for exchange of currency as a result of swap.
Question 2: Can I say “A” is effectively an Interest Rate swap? and only difference which made them currency swap is Buryecs and counter party are i 2 different countries?“B” is question (b) (ii);
with a fixed amount 5000m, fixed period year 4, and fixed rate 0.143.Thank you for your help!
Currency swaps in the exam are essentially interest rate swaps. The extra ‘complication’ is obviously the fact that the amounts need converting from one currency to another, and how this is done depends on what the parties have agreed – you have to be told what the agreement is with regards to that (as is the case in this question).
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