Question
Arthur enters into a 5-year cross currency interest rate swap agreement to receive euro and pay Japanese yen, on a notional principal of 1,500,000. The
Arthur enters into a 5-year cross currency interest rate swap agreement to receive euro and pay Japanese yen, on a notional principal of 1,500,000. The spot exchange rate at the time of the swap is 115/. A five-year bid swap interest rate on the Japanese yen is now 0.31%, and a five-year ask swap interest rate on the Japanese yen is 0.37%. A five-year bid swap interest rate on euro is now 3.7%, and a five-year ask swap interest rate on euro is 3.85%.
a. Calculate all principal and interest payments, in both euro and Japanese yen, for the life of the swap agreement.
b. Assume that three years into the swap agreement Arthur decides it wishes to unwind the swap agreement and settle it in dollar. Assuming that a two-year fixed rate of interest on the Japanese yen is now 0.45%, and a two-year fixed rate of interest on the dollar is now 3.20%, and the spot rate of exchange was 119/ at the end of the second year and 123/ at the end of the third year, what is the net present value of the swap agreement? Who pays whom what?
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