Consider a currency Swap in which the domestic party pays a fixed rate in the foreign currency, the British pound and the counterparty pays a fixed rate in U.S. dollars. The notional principals are $50 million and pound30 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 semiannually.
a. Determine the initial exchange of cash that occurs at the start of the swap.
b. Determine the semiannual payments.
c. Determine the final exchange of cash that occurs at the end of the swap.
d. Give an example of a situation in which this swap may be appropriate.