(b) Unfortunately for you and your institution, the counterparty to the swap (the British

aviation company) has just filed for bankruptcy with 9 months remaining on the swap

agreement. Determine the current value of the swap agreement (and ultimately the cost)

to your institution. You should assume that the current interest rate is 1.75% per annum

in AUD and 1.25% per annum in GBP (with continuous compounding) for all maturities.

It's not just oil prices that have been on the move lately. The differential effects of COVID-19 on difference countries has caused significant movements in exchange rates. Such volatile FX markets increase the need for financial derivatives to hedge such volatility, but it can also increase the counterparty risk involved in such derivative trades. To this end, the financial institution you are working for has a current position in a cross- currency interest rate swap and another GBP (British pounds) currency futures position. Your boss has asked you to evaluate these two positions. The Swap Position 27 months (2.25 years) ago, your institution entered into a three-year cross-currency interest rate swap with a British aviation company. The swap agreement was over-the-counter with the following terms: your institution is to pay 2.95% per annum (with semi-annual compounding) in GBP and receive 6-month LIBOR + 0.75% per annum in AUD. Payments are semi-annual and on a notional principal of AUD20 million. The 6-month LIBOR rate and the spot exchange rate at various dates over the last 27 months are shown in the table below: Date of observation t = 0 (contract initiation) t = 6 months t = 12 months t = 18 months t = 24 months t = 27 months (today) 6-month LIBOR rate observed 2.87% 2.38% 1.92% 0.43% 0.26% 0.20% Spot exchange rate observed (AUD for 1 GBP) 1.7462 1.7764 1.9424 1.8241 1.7685 1.7918 It's not just oil prices that have been on the move lately. The differential effects of COVID-19 on difference countries has caused significant movements in exchange rates. Such volatile FX markets increase the need for financial derivatives to hedge such volatility, but it can also increase the counterparty risk involved in such derivative trades. To this end, the financial institution you are working for has a current position in a cross- currency interest rate swap and another GBP (British pounds) currency futures position. Your boss has asked you to evaluate these two positions. The Swap Position 27 months (2.25 years) ago, your institution entered into a three-year cross-currency interest rate swap with a British aviation company. The swap agreement was over-the-counter with the following terms: your institution is to pay 2.95% per annum (with semi-annual compounding) in GBP and receive 6-month LIBOR + 0.75% per annum in AUD. Payments are semi-annual and on a notional principal of AUD20 million. The 6-month LIBOR rate and the spot exchange rate at various dates over the last 27 months are shown in the table below: Date of observation t = 0 (contract initiation) t = 6 months t = 12 months t = 18 months t = 24 months t = 27 months (today) 6-month LIBOR rate observed 2.87% 2.38% 1.92% 0.43% 0.26% 0.20% Spot exchange rate observed (AUD for 1 GBP) 1.7462 1.7764 1.9424 1.8241 1.7685 1.7918