A Canadian Bank Agrees to a Swap of Making Fixed-Rate

Multiple Choice

A Canadian bank agrees to a swap of making fixed-rate interest payments of $12 million to a UK bank in exchange for floating-rate payments of LIBOR + 4 percent in British pounds for a notional amount of £100 million. The current exchange rate is $1.50/£. The interest payments will be exchanged at the end of the year at the prevailing rates. At the end of year 3, LIBOR rates are 6 percent and the exchange rate is $1.10/£. What is the net payment paid or received in dollars by the Canadian bank?

A) The Canadian bank paid $12 million and received $16.5 million for a net receipt of $4.5 million.
B) The Canadian bank paid $12 million and received $11 million for a net payment of $1 million.
C) The Canadian bank paid $12 million and received $12 million for a net payment of $0 million.
D) The Canadian bank paid $9 million and received $11 million for a net receipt of $2 million.
E) The Canadian bank paid $9 million and received $12 million for a net receipt of $3 million.