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Chapter 6

Example 3

ABC Co is a US company that has issued a 100 million Swiss Francs (CHF)
Eurobond on which it pays interest six-monthly at an annual fixed rate of 6%.

ABC Co has many operations in the USA, so wants to swap its CHF into US
dollars (USD) using a fixed for fixed cross currency swap.

ABC Co's bank has quoted a cross currency swap exchange rate of CHF/USD
1.10 (that is, CHF 1 = USD 1.10), and fixed interest rates of 5.5% on USD in
exchange for 6% on CHF, with interest payable semi-annually (that is, every
six months).

Required:

Show how the fixed for fixed cross currency swap would work in the
circumstances described, assuming the swap is only for one year and
that interest is paid every six months.

Solution

Timing Explanation Cash flows

Now Exchange Pay CHF 100m to
principals (at swap the bank and receive
rate of CHF1 = USD 110m
USD 1.10)

6 months’ time Pay swap interest Pay USD 3.025m
to bank (5.5% ×
USD110m × 6/12)
Receive swap Receive CHF 3m
interest from bank
(6% × CHF100m ×
6/12)

Pay Eurobond Pay CHF 3m
interest

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