Suppose that the term structure of interest rates is flat in the United States and Australia.

The USD interest rate is 7% per annum and the AUD rate is 9% per annum. The current value of the AUD is 0.62 USD. Under the terms of a swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. The principals in the two currencies are $12 million USD and 20 million AUD. Payments are exchanged every year, with one exchange having just taken ‘place. The swap will last 2 more years. What is the value of the swap to the financial institution? Assu.me all interest rates are continuously compounded.