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1. A currency swap has a remaining life of 15 months. It involves exchanging interest at 10% on 20 million for interest at 6% on
1. A currency swap has a remaining life of 15 months. It involves exchanging interest at 10% on 20 million for interest at 6% on $30 million once a year. The term structure of risk-free interest rates in the UK is flat at 7% and the term structure of risk-free rates in the US is flat at 4% (both with annual compounding). The current exchange rate (dollars per pound sterling) is 1.5500. a) Compute the value of the swap to the party paying sterling using the bond method b) Compute the value of the swap to the party paying dolar using the FRA method
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