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Hi John,
I don’t get how the swap works. At inception, Buryecs will swap principal amount of 5000m with counterparty and Buryecs will pay interest for the counterparts in Euro and counterparts will pay for interest in Wirtonia $.
At the end of 3 years, what happens to the swap and what has it go to do with the 5000m received from government in Wirtonia? I don’t understand how the swap works for currency swap.
Thanks for your time
For b(i) the swap works in exactly the same way as an interest rate swap and the % saving is calculated in the same way.
For b(ii) when the question wants the gain or loss in €’s, then it is following the instructions given in the question, which is that the income will be converted at the relevant spot rate each year. When they 7,500 is received, then the 5,000 that was part of the swap (the principal) is converted at ‘today’s spot rate’ and the extra 2,500 is converted at whatever the spot rate is in 3 years time.
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