Free CFA Certification Practice Questions:


A US bank and a Italian bank enter into a plain vanilla currency swap. The swap has a notional principal of $30M ( 23M Euro). At each settlement date, the US bank pays a fixed rate of 4 percent on the Euros received, and the Italian bank pays a variable rate equal to LIBOR + 2.5 percent on the US dollars received.

Given the following LIBOR Rates, what payments are made at the end of Year 3?

  0 1 2 3 4
LIBOR Rates 3.25% 3.50% 4.00% 4.25% 3.75%


A) US Bank pays 0.92M Euros, Italian Bank pays $1.95M dollars

B) US Bank pays 0.92M Euros, Italian Bank pays $1.20M dollars

C) US Bank pays 0.92M Euros, Italian Bank pays $2.025M dollars

  • [Ans: A]


    • The US Bank pays a fixed rate of 4.0% on the Euro's received, which is 23M Euros. This is an annual payment of 0.92M Euros.

    The Italian Bank pays a variable rate equal to LIBOR + 2.5 percent. The variable rate to be used at Year 3 is set at Year 2 (arrears method). Hence, the variable rate is 4% + 2.5% = 6.5%

    The Italian Bank pays 6.5% of $30,000,000 at Year 3, which is $1.95M.






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