In the candidates resource questions, “Matthew Riley Case Scenario”, why it is the answer to the question – “the annual fixed swap rate Mehta would pay…” is that of the interest rate on HKD. He is come into the interest rate swap where he took euro and gave HKD, so he should pay the interest on euro but the answer says otherwise.
Can someone please explain?
Mehta, who is based in Hong Kong SAR and requires a €25,000,000 one-year bridge loan to fund operations in Germany. He wants to fund this loan at a competitive rate. Riley advises Mehta to borrow in HK dollars and enter into a one-year foreign currency swap to swap into euros. The current exchange rate is HK$9.15 per euro. Exhibit 1 below provides Hong Kong and euro spot interest rates and present value factors.
Based on the information in Exhibit 1, the annual fixed swap rate Mehta would pay is closest to:
Days to Maturity | HK Dollars Spot Interest Rates (%) |
HK Dollars Present Value Factors |
Euro Spot Interest Rates (%) |
Euro Present Value Factors |
90 | 0.610 | 0.9985 | 0.372 | 0.9991 |
180 | 0.765 | 0.9962 | 0.422 | 0.9979 |
270 | 0.850 | 0.9937 | 0.448 | 0.9967 |
360 | 0.935 | 0.9907 | 0.468 | 0.9953 |
https://forum.sseiqforum.com/question/derivatives-matthew-riley-case-scenario/
Thank you