Use the following information to answer questions 5 to 7: Assume you have the lo

Question

Use the following information to answer questions 5 to 7: Assume you have the long GBP position in a 6-Year at-market fixed-for-fixed USD/GBP currency swap. Payments occur at the end of each year. The notional amount is USD 1,000,000. The interest rates are ruso = 5% and rGBP-696. The spot rate when the contract originated wasXUG-1.50. Problem 5: At the end of year one, how much and in what currency do you have to pay party assuming that you would NOT settle with a difference check (please note that you cannot calculate the difference check yet)? the other swap Problem 6: At the end of year one, how much and in what currency should you receive by the other swap party assuming that you would NOT settle with a difference check (please note that you cannot calculate the difference check yet)? Problem 7: At the end of year 6, the spot rate 1.55. Find the two difference checks, one for the last interest payment and one for the principal payment. Recall you took a long positon in the swap

Explanation / Answer

Problem 5 : Payment at the end of 1st Year : Only Interest Payment would be made

GBP Interest = [USD 1,000,000 / Exchange Rate of USD/GBP] * GBP Interest Rate

= [USD 1,000,000/1.5 USD/GBP] * 6%

= GBP 40,000

Problem 6 : USD Interest to be received at the end of 1st year

USD Interest = USD 1,000,000 * 5%

= USD 50,000

Problem 7 : Notional Payment in GBP = USD 1,000,000 / 1.5 USD/GBP

= GBP 6,66,667

Interest Payment in GBP = [USD 1,000,000 / 1.55 USD/GBP] * 6%

= GBP 38,710

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