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A US-based investor owns a fixed-coupon, semiannual payment, Euro denominated bond position with a face value of 15,000,000 and three years until maturity. The investor
A US-based investor owns a fixed-coupon, semiannual payment, Euro denominated bond position with a face value of 15,000,000 and three years until maturity. The investor is worried about exchange rate risk and enters into a pay euros fixed, receive US dollars fixed currency swap with semiannual payments for three years to offset this risk. The current exchange rate is 1.15 per US dollar. a. What is the required notional amount in each currency? (2 points) b. If the current term structure of interest rates (annualized using 30/360 day count) is as given below, what is the annualized fixed rate in each currency? ( 2 points) c. Two years have passed and the investor wishes to value the swap position. The current term structure of interest rates is as given below and the exchange rate is 1.20 per USD. What is the value in USD of the pay EUR fixed, receive USD fixed currency swap? (3 points) A US-based investor owns a fixed-coupon, semiannual payment, Euro denominated bond position with a face value of 15,000,000 and three years until maturity. The investor is worried about exchange rate risk and enters into a pay euros fixed, receive US dollars fixed currency swap with semiannual payments for three years to offset this risk. The current exchange rate is 1.15 per US dollar. a. What is the required notional amount in each currency? (2 points) b. If the current term structure of interest rates (annualized using 30/360 day count) is as given below, what is the annualized fixed rate in each currency? ( 2 points) c. Two years have passed and the investor wishes to value the swap position. The current term structure of interest rates is as given below and the exchange rate is 1.20 per USD. What is the value in USD of the pay EUR fixed, receive USD fixed currency swap? (3 points)
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