Question
LIBOR zero rates are flat at 5% in the U.S and flat at 10% in Australia (both annually compounded). In a four-year diff swap Australian
LIBOR zero rates are flat at 5% in the U.S and flat at 10% in Australia (both annually compounded). In a four-year diff swap Australian LIBOR is received and 9% is paid with both being applied to a USD principal of $10 million. Payments are exchanged annually. The volatility of all one-year forward rates in Australia is estimated to be 25%, the volatility of the forward USDAUD exchange rate (AUD per USD) is 15% for all maturities, and the correlation between the two is 0.3. Assume a USD risk-free discount rate of 4.7%. What is the value of the swap?
Step 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