You are the party paying pounds and receiving euro and wanted to get out of a swap that you entered into 8 years ago, what specific strategy could you use with forward contracts to "defease" the swap? Here are the details of that swap: An 8-year old swap with 2 years remaining maturity. At initiation of the swap, spot exchange rates were So($/ €) = $1.16/€, So($/£) = $1.45/£, and So(€/ £) = €1.25/£. The swap calls for exchanging interest only on €10m at 5.04 percent for £8.0m at 4 percent. SEMIANNUAL payments. The most recent payment was yesterday. Today's exchange rates are So($/ €) = $1.25/€ and So($/£) = $1.50/£. The current AAA rates are is = 3.5%, i = 5.0%, and i€ = 7.1% O Go long in 4 forward contracts on £160,000 with maturities of 6, 12, 18, and 24 months priced in euro. O Go short in 4 forward contracts on £160,000 with maturities of 6, 12, 18, and 24 months priced in euro. O Go long in 4 forward contracts on €252,000 with maturities of 6, 12, 18, and 24 months priced in pounds O Go short in 4 forward contracts on €252,000 with maturities of 6, 12, 18, and 24 months, priced in USD.
You are the party paying pounds and receiving euro and wanted to get out of a swap that you entered into 8 years ago, what specific strategy could you use with forward contracts to "defease" the swap? Here are the details of that swap: An 8-year old swap with 2 years remaining maturity. At initiation of the swap, spot exchange rates were So($/ €) = $1.16/€, So($/£) = $1.45/£, and So(€/ £) = €1.25/£. The swap calls for exchanging interest only on €10m at 5.04 percent for £8.0m at 4 percent. SEMIANNUAL payments. The most recent payment was yesterday. Today's exchange rates are So($/ €) = $1.25/€ and So($/£) = $1.50/£. The current AAA rates are is = 3.5%, i = 5.0%, and i€ = 7.1% O Go long in 4 forward contracts on £160,000 with maturities of 6, 12, 18, and 24 months priced in euro. O Go short in 4 forward contracts on £160,000 with maturities of 6, 12, 18, and 24 months priced in euro. O Go long in 4 forward contracts on €252,000 with maturities of 6, 12, 18, and 24 months priced in pounds O Go short in 4 forward contracts on €252,000 with maturities of 6, 12, 18, and 24 months, priced in USD.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:Question 2
You are the party paying pounds and receiving euro and wanted to get out of a swap that you entered into 8 years ago,
what specific strategy could you use with forward contracts to "defease" the swap?
Here are the details of that swap:
An 8-year old swap with 2 years remaining maturity.
At initiation of the swap, spot exchange rates were So($/€) = $1.16/€, So($/£) = $1.45/£, and So(€/£) = €1.25/£.
The swap calls for exchanging interest only on €10m at 5.04 percent for £8.0m at 4 percent. SEMIANNUAL payments.
The most recent payment was yesterday.
Today's exchange rates are So($/€) = $1.25/€ and So($/£) = $1.50/£.
The current AAA rates are is = 3.5%, ig = 5.0%, and iç = 7.1%
O Go long in 4 forward contracts on £160,000 with maturities of 6, 12, 18, and 24 months priced in euro.
O Go short in 4 forward contracts on £160,000 with maturities of 6, 12, 18, and 24 months priced in euro.
O Go long in 4 forward contracts on €252,000 with maturities of 6, 12, 18, and 24 months priced in pounds
O Go short in 4 forward contracts on €252,000 with maturities of 6, 12, 18, and 24 months, priced in USD.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education