A New Zealand based financial institution has entered into a currency swap where it pays 4% per annum in NZD and receives 2% per annum in USD. The principals in the two currencies are 10 million USD and 15 million NZD. Payments are exchanged every year, with one exchange having just taken place. The swap will last 4 more years and the current exchange rate is 0.69 USD per NZD. Assume all interest rates are continuously compounded. The hypothetical yield curves for New Zealand and the United States are : Years from Today New Zealand United States 1 3.50% 1.00% 2 4.00% 1.50% 3 4.50% 2.00% 4 5.00% 2.50% a) Find the value of the swap (in USD) from the perspective of the NZ financial institution using bond methodology. (3 marks) b) Find the value of the swap (in USD) using the forward contracts methodology. (3 marks) Discuss the impact of an increase in interest rates in New Zealand on the value of the above currency swap (in USD). Assume a parallel shift of yield curve. (2 marks) d) Discuss the effect of appreciation vs. depreciation of NZD on the value of the swap to the NZ financial institution. (2 marks) A New Zealand based financial institution has entered into a currency swap where it pays 4% per annum in NZD and receives 2% per annum in USD. The principals in the two currencies are 10 million USD and 15 million NZD. Payments are exchanged every year, with one exchange having just taken place. The swap will last 4 more years and the current exchange rate is 0.69 USD per NZD. Assume all interest rates are continuously compounded. The hypothetical yield curves for New Zealand and the United States are : Years from Today New Zealand United States 1 3.50% 1.00% 2 4.00% 1.50% 3 4.50% 2.00% 4 5.00% 2.50% a) Find the value of the swap (in USD) from the perspective of the NZ financial institution using bond methodology. (3 marks) b) Find the value of the swap (in USD) using the forward contracts methodology. (3 marks) Discuss the impact of an increase in interest rates in New Zealand on the value of the above currency swap (in USD). Assume a parallel shift of yield curve. (2 marks) d) Discuss the effect of appreciation vs. depreciation of NZD on the value of the swap to the NZ financial institution. (2 marks)