Question
2.IBMentersintoaFXswapagreementwithCitibankforoneyear.Theywillswaptwice,6 monthsfromnowandthen12monthsfromnow.IBMwillpay6%on$10MandCitibankwill pay8%on11M.Thespotexchangerateis0.909091$/(i.e.10/11) a. WhatcashflowswillthisFXswapagreementgenerate? b. Suppose you know that the U.S. 6month interest rate is 6% and the 12-month interest rate is 8%. The
2.IBMentersintoaFXswapagreementwithCitibankforoneyear.Theywillswaptwice,6
monthsfromnowandthen12monthsfromnow.IBMwillpay6%on$10MandCitibankwill
pay8%on11M.Thespotexchangerateis0.909091$/(i.e.10/11)
a. WhatcashflowswillthisFXswapagreementgenerate?
b. Suppose you know that the U.S. 6month interest rate is 6% and the 12-month interest rate is 8%. The European 6-month interest rate is 7%. All rates are annualized interest rates, compounding semi-annually. Suppose the swap has an initial value of zero, what should be the
European 12month interest rate?
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