Question
Could you please provide an answer with an explanation. Thanks in advance! Consider a currency swap with 3 years remaining. A financial institution receives 3.0%
Could you please provide an answer with an explanation. Thanks in advance!
Consider a currency swap with 3 years remaining. A financial institution receives 3.0% p.a. in sterling (GBP) and pays 1.5% p.a. in dollars (USD) once a year. The LIBOR/swap interest rate curve with continuous compounding is flat in both countries. The British interest rate is 2.5% p.a. and the US interest rate is 2.0% p.a. The principal amounts are 10 million GBP and $15 million USD, and the current exchange rate is $1.5 = 1. By valuing the currency swap as fixed-rate bonds, what is the value of the currency swap in USD?
A. $14.78 million
B. $10.13million
C. $0.43million
D. $0.28 million
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