A currency swap has a remaining life of 12 months. It involves exchanging interest at 11% on £25 million for interest at 7% on $40 million once a year. The term structure of interest rates in both the United Kingdom and the United States is currently flat, and if the swap terms were negotiated today the interest rates exchanged would be 5.5% in dollars and 7.5% in sterling. All interest rates are quoted with annual compounding. The current exchange rate (dollars per pound sterling) is 1.7600. Calculate the current value of the swap to the party paying sterling using the bond valuation approach. What is the value of the swap to the party paying dollars? Calculate the current value of the swap to the party paying sterling by viewing the swap as a portfolio of forward contracts.
A currency swap has a remaining life of 12 months. It involves exchanging interest at 11% on £25 million for interest at 7% on $40 million once a year. The term structure of interest rates in both the United Kingdom and the United States is currently flat, and if the swap terms were negotiated today the interest rates exchanged would be 5.5% in dollars and 7.5% in sterling. All interest rates are quoted with annual compounding. The current exchange rate (dollars per pound sterling) is 1.7600.
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Calculate the current value of the swap to the party paying sterling using the
bond valuation approach. What is the value of the swap to the party paying dollars? -
Calculate the current value of the swap to the party paying sterling by viewing the swap as a portfolio of forward contracts.
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