Consider the following currency swap: Counterparty A swaps 5% on $30 million for

Question

Consider the following currency swap: Counterparty A swaps 5% on $30
million for 7.5% on 20 million sterling. There are now 6 months remaining
in the swap and the next coupon payment is in 6 months, the term structures of interest rates are flat in both countries, with dollar rates currently at 4.25% and Sterling rates currently at 7.75%. The
current $/sterling exchange rate is $1.65. Calculate the value of the swap.

Question options:

1)

2)

3)

4)

1)

?$1,237,500

2)

?$456,941.6

3)

?$8,223,203

4)

?$8,250,000

Explanation / Answer

Option B

value of Swap = Present Value of $ Payment - Present Value of Pound Interest Payment in US Dollar

value of Swap = ($ 30000000 * 5.00% / 2) / (1 + 0.02125) - (Pound 20000000 * 7.50% / 2 * 1.65) / (1 + 0.03875)

value of Swap = $734394.10 - $1191335.70

value of Swap = -$456941.60

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