Suppose currently the 3-month USD Libor is 4%, the 5-year swap rate is 5%, the 3-month EURIBOR is 3%, and the 5-year swap rate is 6%. The forward exchange rates between USD and Euro up to five years are the same as the spot exchange rate. In a 5-year differential swap in which counterparties exchange 3-month USD Libor plus a margin and 3-month EURIBOR flat, both paid in USD, the margin should be:(a) positive (b) zero (c) negativeMy Prof. said the correct answer is (a) positive (definite and only this answer is correct!), is it possible that the margin is negative (USD Libor - x.xx%)?

I am baffled. If the 3month rates themselves are different for USD and EUR how can the spot be the same as all forwards ?

so do you think the answer is 100% correct?

Intuitively I would say the strike of a swap is the average of forward rates. And since the EUR swap rate is 6% and the USD swap rate is 5%, there can (might) be a point in time where the EUR forward is higher than the USD, thus the spread can be negative, assuming the +bps in the USD is neglible