Assume the notional principal is $1 (or the equivalent in British pounds). Calculate the following swaps' market values: B.1 Pay £ fixed and received $ fixed. B.2 Pay £ floating and receive $ fixed. B.3 Pay £ floating and receive $ floating. B.4 Pay £ fixed and receive $ floating.
Assume the notional principal is $1 (or the equivalent in British pounds). Calculate the following swaps' market values: B.1 Pay £ fixed and received $ fixed. B.2 Pay £ floating and receive $ fixed. B.3 Pay £ floating and receive $ floating. B.4 Pay £ fixed and receive $ floating.
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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Assume the notional principal is $1 (or the equivalent in British pounds). Calculate the following swaps' market values:
B.1 Pay £ fixed and received $ fixed.
B.2 Pay £ floating and receive $ fixed.
B.3 Pay £ floating and receive $ floating.
B.4 Pay £ fixed and receive $ floating.
Transcribed Image Text:Take into account a two-year currency swap with semiannual payments. The US
dollar is the local currency, whereas the British pound is the foreign currency.
The current pound-to-dollar exchange rate is $1.38.
A. Determine the annualized fixed rates the two currencies, given the following
countries' term structures:
US Term Structure
Lo(180) = 0.0579
Lo(360) = 0.0608
Lo(540) = 0.0622
Lo(720) = 0.0661
UK Term Structure
%3D
B. Now let's fast forward 120 days. The new exchange rate is $1.32 per pound,
and the new term structures of the countries are as follows:
US Term Structure
Lo(180) = 0.0607
Lo(360) = 0.0632
Lo(540) = 0.0651
Lo(720) = 0.0693
UK Term Structure
%3D
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