A currency swap has a remaining life of 15 months. It involves exchanging interest at 10% on GBP 20 million (British Pounds) for interest at 6% on USD 30 million once a year. The term structure of interest rates in both the UK and the US is currently flat, and if the swap were negotiated today the interest rates exchanged would be 4% in USD and 7% in GBP. All interest rates are quoted with annual compounding. The current exchange rate (USD per GBP) is 1.55. What is the value of the swap to the party paying GBP? What is the value of the swap to the party paying USD?

A currency swap has a remaining life of 15 months. It involves exchanging interest at 10% on GBP 20 million (British Pounds) for interest at 6% on USD 30 million once a year. The term structure of interest rates in both the UK and the US is currently flat, and if the swap were negotiated today the interest rates exchanged would be 4% in USD and 7% in GBP. All interest rates are quoted with annual compounding. The current exchange rate (USD per GBP) is 1.55. What is the value of the swap to the party paying GBP? What is the value of the swap to the party paying USD?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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