Problem 7.24 For all maturities, the US dollar (USD) interest rate is 7% per annum and the Australian dollar (AUD) rate is 9% per annum. The current value of the AUD is 0.62 USD. In a swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. The principals in the two currencies are USD 12 million and AUD 20 million. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. What is the value of the swap to the financial institution? Assume all interest rates are continuously compounded. The financial institution is long a dollar bond and short a USD bond. The value of the dollar bond (in millions of dollars) is 0.48e-0.07x1 +12.48e -0.07x2 = 11.297 The value of the AUD bond (in millions of AUD) is 1.6e -0.09x1 +21.6e -0.09x2 = 19.504 The value of the swap (in millions of dollars) is therefore 11.297-19.504x0.62=-0.795 or -$795,000.