Consider a currency swap in which the domestic party pays a fixed rate in foreign currency, the UK pounds sterling, and the counterparty pays a fixed rate in US Dollars. The notional principals are $50 million and $30 million. The fixed rates are 5.6% in dollars and 6.25% in pounds. Both sets of payments are made on the basis of 30 days per month and 365 days per year and the payments are made semi-annually.
(a) Evaluate the initial exchange of cash that occurs at the start of the swap.
(b) Evaluate the semi-annual payments.
(c) Calculate the final exchange of cash that occurs at the end of the swap.
(d) Show an example of a situation in which this swap might be appropriate.