In a fixed-for-fixed currency swap, 3% on a US dollar principal of $150 million is received and 4% on a British pound principal of 100 million pounds is paid. The current exchange rate is 1.55 dollar per pound. Interest rates in both countries for all maturities are currently 5% (continuously compounded). Payments are exchanged every year. The swap has 2.5 years left in its life. What is the value of the swap?

Group of answer choices

$7.15

$8.15

$9.15 ( Correct Answer)

$10.15

Answer: C The value of the British pound bond underlying the swap is in millions of pounds 4e-0.050.5+4e-0.051.5+104e-0.052.5 = 99.39 The value of the U.S. dollar bond is in millions of dollars 4.5e-0.050.5+4.5e-0.051.5+154.5e-0.052.5 = 144.91 The value of the swap is 144.91 99.391.55 = 9.15