Question
Consider the following swap contract: Americana Auto Company enters into a swap with Britannia Bus Corporation with a three-year term contract on a principal of
Consider the following swap contract:
Americana Auto Company enters into a swap with Britannia Bus Corporation with a three-year term contract on a principal of USD200 million.
- The spot exchange rate is USD2.00 per GBP.
- Americana pays Britannia 4 percent per year on GBP100 million and Britannia pays Americana 6 percent per year on USD200 million at the end of each year for three years.
- The companies make these interest payments every six months: the swap ends after six semi-annual payments and the principals are handed back after three years.
Using zero-coupon bond prices (maturing every six months) given below, compute the value of this swap. Zero-Coupon Bond Prices in the United States (Domestic Country) and the United Kingdom (Foreign Country)
Zero-Coupon Bond Prices in the United States (Domestic Country) and the United Kingdom (Foreign Country) Time to Maturity (in years) US (Domestic) Zero- Coupon Bond Prices (in dollars) UK (Foreign) Zero- Coupon Bond Prices (in pounds sterling) 0.5 B(0.5) = $0.99 B(1) = 0.97 1.5 B(1.5) = 0.95 B(0.5)= 0.98 B(1) = 0.96 B(1,5) = 0.93 B(2) = 0.91 B(2.5) = 0.88 2 B(2) = 0.93 2.5 B(2.5) = 0.91 B(3) = 0.88 B(3) = 0.85 Zero-Coupon Bond Prices in the United States (Domestic Country) and the United Kingdom (Foreign Country) Time to Maturity (in years) US (Domestic) Zero- Coupon Bond Prices (in dollars) UK (Foreign) Zero- Coupon Bond Prices (in pounds sterling) 0.5 B(0.5) = $0.99 B(1) = 0.97 1.5 B(1.5) = 0.95 B(0.5)= 0.98 B(1) = 0.96 B(1,5) = 0.93 B(2) = 0.91 B(2.5) = 0.88 2 B(2) = 0.93 2.5 B(2.5) = 0.91 B(3) = 0.88 B(3) = 0.85Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started