
282 INTERNATIONAL FINANCIAL MANAGEMENT
is the interest on the principal of USD 1 million for six months at 6 percent per annum. Firm
Y pays to Firm X interest on the principal of USD 1 million at the six-month LIBOR prevail-
ing six months prior to 1 December 2014 (i.e. on 1 June 2014). If the six-month LIBOR on 1
June 2014 is 5 percent per annum, then Firm Y pays to Firm X USD 0.025 million (i.e. USD 1
million × 0.05/2). As far as the first payment of interest is concerned, there is no uncertainty,
since the interest rate is determined by the LIBOR at the time the contract is signed.
The next exchange of payments takes place on 1 June 2015, o ...