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A financial institution has entered into a 10 -year currency swap with company Y. Under the terms of the swap, the financial institution receives interest

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A financial institution has entered into a 10 -year currency swap with company Y. Under the terms of the swap, the financial institution receives interest at 3.5% per annum in Swiss francs and pays interest at 7.5% per annum in U.S. dollars. Interest payments are exchanged once a year. The principal amounts are 7 million dollars and 10 million francs. Suppose that company Y declares bankruptcy at the end of year 7 just before the exchange of payment, when the exchange rate is $0.80 per franc. Assume that, at the end of year 7, the risk-free interest rate is 3% per annum in Swiss francs and 8% per annum in U.S. dollars for all maturities. All interest rates are quoted with annual compounding. Assume that the theoretical forward exchange rates can be realized. Required: What is the cost of losing the swap contract due to the bankruptcy at the end of year 7 to the financial institution in U.S. dollars? That is, calculate the value of the swap contract to the financial institution at the end of year 7 . You may calculate the value either in terms of the underlying bonds or of the corresponding FRAs

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