Question
A currency swap has a remaining life of 15 months. It involves exchanging interest payment at 9.15% on 25 million for interest payment at 6.35%
A currency swap has a remaining life of 15 months. It involves exchanging interest payment at 9.15% on 25 million for interest payment at 6.35% on $32 million, once a year. The term structure of risk-free interest rates in the United Kingdom is flat at 6.5% and the term structure of risk-free rates in the United States is flat at 4.1% (both with continuous compounding). The current exchange rate (dollars per pound sterling) is 1.3250. What is the value of the swap to the party paying sterling? What is the value of the swap to the party paying dollars?
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