Prolem 23:13 Suppose the U.S. yield curve is flat at 5% and the euro yield curve

Question

Prolem 23:13

Suppose the U.S. yield curve is flat at 5% and the euro yield curve is flat at 3%. The current exchange rate is $1.3 per euro. What will be the swap rate on an agreement to exchange currency over a 3-year period? The swap will call for the exchange of 1.3 million euros for a given number of dollars in each year.(Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Suppose the U.S. yield curve is flat at 5% and the euro yield curve is flat at 3%. The current exchange rate is $1.3 per euro. What will be the swap rate on an agreement to exchange currency over a 3-year period? The swap will call for the exchange of 1.3 million euros for a given number of dollars in each year.(Do not round intermediate calculations. Round your answer to the nearest dollar amount. Omit the "$" sign in your response.)

Explanation / Answer

Given Spot Rate 1Euro=1.3$,Euro rate=3%, US yield rate=5%

so after one year rate would

(1+(1*3%))EURO=(1.3+(1.3*5%))$

1.03EURO=1.365$

Therefore Swap rate for 1st year 1Euro=1.365$/1.03

1Euro=1.325

so for 1.3m Euro = (1.3*1.325)$

so for calling 1.3million Euro =1.723Million $ is required

for end of 2nd year

(1+(1*3%))EURO=(1.325+(1.325*5%))$

Swap rate = 1Euro=1.351$

so for 1.3m Euro = (1.3*1.351)$

so for calling 1.3million Euro =1.756Million $ is required

for end of 3nd year

(1+(1*3%))EURO=(1.351+(1.351*5%))$

Swap rate = 1Euro=1.377$

so for 1.3m Euro = (1.3*1.377)$

so for calling 1.3million Euro =1.790Million $ is required

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