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All main topics / Finance & Investment / Derivatives / Derivatives
In a fixed-for-fixed currency swap, 3% on a US dollar principal of $150 million is received and 4% on a British pound principal of 100 million pounds is paid. The current exchange rate is 1.55 dollar per pound. Interest rates in both countries for all maturities are currently 5% (continuously compounded). Payments are exchanged every year. The swap has 2.5 years left in its life. What is the value of the swap?
A. −$7.15
Answer: C

The value of the British pound bond underlying the swap is in millions of pounds
4e-0.05×0.5+4e-0.05×1.5+104e-0.05×2.5 = 99.39
The value of the U.S. dollar bond is in millions of dollars
4.5e-0.05×0.5+4.5e-0.05×1.5+154.5e-0.05×2.5  = 144.91
The value of the swap is 144.91 – 99.39×1.55 = –9.15

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Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015




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