a. 2. Currency swap Using the table of swap rates, assume you enter into a four year swap agreement to receive dollars and pay euro on a notional principal of $1,000,000. The spot exchange rate at the time of the swap is $1.20/, Calculate all principal and interest payments, in both USD and euro, for the life of the swap agreement. b. Assume that two years into the swap agreement you decide to unwind the swap agreement and settle it in USD. Assuming that a two-year fixed rate of interest on the USD is now 4.60 %, and a two-year fixed rate of interest on the euro is now 2.80%, and the spot rate of exchange is now $1.10/, what is the net present value of the agreement? Who pays whom what? Swiss franc Euro-E Bid Ask Years Bid 1 2.99 3.08 1.43 1.68 2 3 3.24 1.93 4 5 3.02 3.12 3.28 3.48 3.67 3.87 4.05 4.22 4.36 3.44 3.63 3.83 4.01 4.18 4.32 2.15 2.35 2.54 2.73 5.83 6 7 U.S. dollar Bid Ask 5.24 5.26 5.43 5.46 5.56 5.59 5.65 5.68 5.73 5.76 5.80 5.86 5.89 5.92 5.95 5.96 5.99 6.01 6.04 6.10 6.13 6.20 6.23 6.29 6.32 6.29 6.32 6.28 6.31 5.0625 Japanese yen Bid Ask 0.23 0.26 0.36 0.39 0.56 0.59 0.82 0.85 1.09 1.12 1.33 1.36 1.55 1.58 1.78 1.90 1.93 2.04 2.07 2.28 2.32 2.51 2.56 2.71 2.76 2.77 2.82 2.82 2.88 0.1250 0.2188 Ask 1.47 1.76 2.01 2.23 2.43 2.62 2.81 2.99 3.16 3.30 3.55 3.81 4.06 4.17 4.26 1.4375 8 2.91 1.75 9 10 12 4.42 4.58 4.78 5.00 4.46 4.62 4.82 15 3.08 3.22 3.45 3.71 3.96 4.07 4.16 1.3125 5.04 5.13 20 25 30 LIBOR 5.19 5.17 5.23 3.0938 3.0313 4.9375 Typical presentation by the Financial Times. Bid and ask spreads as of close of London business. USS is quoted against 3-month LIBOR; Japanese yen against 6-month LIBOR; Euro and Swiss franc against 6-month LIBOR. a. 2. Currency swap Using the table of swap rates, assume you enter into a four year swap agreement to receive dollars and pay euro on a notional principal of $1,000,000. The spot exchange rate at the time of the swap is $1.20/, Calculate all principal and interest payments, in both USD and euro, for the life of the swap agreement. b. Assume that two years into the swap agreement you decide to unwind the swap agreement and settle it in USD. Assuming that a two-year fixed rate of interest on the USD is now 4.60 %, and a two-year fixed rate of interest on the euro is now 2.80%, and the spot rate of exchange is now $1.10/, what is the net present value of the agreement? Who pays whom what? Swiss franc Euro-E Bid Ask Years Bid 1 2.99 3.08 1.43 1.68 2 3 3.24 1.93 4 5 3.02 3.12 3.28 3.48 3.67 3.87 4.05 4.22 4.36 3.44 3.63 3.83 4.01 4.18 4.32 2.15 2.35 2.54 2.73 5.83 6 7 U.S. dollar Bid Ask 5.24 5.26 5.43 5.46 5.56 5.59 5.65 5.68 5.73 5.76 5.80 5.86 5.89 5.92 5.95 5.96 5.99 6.01 6.04 6.10 6.13 6.20 6.23 6.29 6.32 6.29 6.32 6.28 6.31 5.0625 Japanese yen Bid Ask 0.23 0.26 0.36 0.39 0.56 0.59 0.82 0.85 1.09 1.12 1.33 1.36 1.55 1.58 1.78 1.90 1.93 2.04 2.07 2.28 2.32 2.51 2.56 2.71 2.76 2.77 2.82 2.82 2.88 0.1250 0.2188 Ask 1.47 1.76 2.01 2.23 2.43 2.62 2.81 2.99 3.16 3.30 3.55 3.81 4.06 4.17 4.26 1.4375 8 2.91 1.75 9 10 12 4.42 4.58 4.78 5.00 4.46 4.62 4.82 15 3.08 3.22 3.45 3.71 3.96 4.07 4.16 1.3125 5.04 5.13 20 25 30 LIBOR 5.19 5.17 5.23 3.0938 3.0313 4.9375 Typical presentation by the Financial Times. Bid and ask spreads as of close of London business. USS is quoted against 3-month LIBOR; Japanese yen against 6-month LIBOR; Euro and Swiss franc against 6-month LIBOR
