1) Fixed rate payer pays 6%, therefore (0.06 / 2) x 10 million = USD 300,000.
Interest rate swaps have payments in arrears. Floating rate payer pays LIBOR rate at the beginning of period + 0.50%, i.e. 5 % + 0.50% = 5.5 %.
Therefore the floating rate payment = (0.055 / 2) x 10 million = USD 275,000.
The net payment of USD 25,000 is paid by the fixed rate payer.
2) All the currencies have been considered. The relevance of S.D. is not much in this question except that the presence of S.D. implies risk.
Net currency position = Exchange bought - Exchange sold
Therefore, positive net currency position implies net long position,
negative net currency position implies net short position
If we are net short, i.e, we have sold more in futures/ forwards, then if prices rise later, we will buy from open market at higher price and deliver at the contracted lower price. Therefore, in net short position, risk arises if exchange rate (price of currency) rises.
If we are net long, i.e, we have bought more in futures/ forwards. Then if prices fall later, we will be buying at the contracted higher price. Therefore, in net long position, risk arises if exchange rate (price of currency) falls.
Let us look at the answer options.
a) Is correct - because net currency position is (-$2,50,000), hence we are net short. Also, risk arises only if DM rates rise.
b) Is incorrect - because net currency position is $5,30,000, i.e., we are net long, not net short
c) Is incorrect - because net currency position is (-$455,3501), i.e., we are net short, not net long.
d) Is incorrect - because even though we are net long in the Swiss franc , risk arises only if Swiss franc falls, not if it rises in value against the U.S. dollar.
I hope we have answered your query.
3) BNP will pay Credit Agricole a fixed rate of interest at every interval and will receive floating rate of interest from Credit Agricole that is LIBOR. Now it is said that LIBOR has started trending down which means BNP will end up paying more interest than receiving from Credit Agricole. The risk in this case is that BNP may default on its obligation since it is paying a higher rate of interest than the market, which increases credit risk for Credit Agricole.