Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 3 (10 Marks) As an Australian investor, you have just bought a 3-year EuroPound bond in SGD dollar which is priced at par $1000

Question 3 (10 Marks)

As an Australian investor, you have just bought a 3-year EuroPound bond in SGD dollar which is priced at par $1000 SGD. Given your knowledge with respect to derivatives trading, you have decided to hedge your position using a fixed-for-fixed currency swap. You observe the following current information:

Spot foreign exchange rate is $0.95 AUD for $1 SGD

The tenor of the swap is 3 years

Interest is repaid every half a year

The inferred market yield of an equivalent 3-year AUD bond is 4% pa

The inferred market yield of an equivalent 3-year SGD bond is 6% pa

With respect to the currency swap, how much are you lending and borrowing and in what currency for each, and what would be the possible reason(s) for taking this hedging position? (3 Marks)

b. Three months have passed. The swap now has 33 months to maturity. The market yield of an equivalent 33-months to maturity AUD bond is 4.5% pa. The market yield of an equivalent 33-months to maturity SGD bond is 5% pa. Todays spot exchange rate is $0.99 AUD for $1 SGD. If you and the swap counterparty decided to terminate the swap today via mutual agreement, how much do you have to pay or receive to settle the swap termination? (4 Marks)

c. Now, 2 years have passed since the initiation of the swap and the swap now has 1 year to maturity. The market yield of an equivalent 1-year AUD bond remains at 4% pa. Likewise, the market yield of an equivalent 1-year SGD bond remains at 6% pa. What is the value of the swap for the counterparty if the current spot exchange rate remains at $0.99 AUD = $1 SGD? If the current spot exchange rate changes to $0.8 AUD = $1 SGD? If the current spot exchange rate decreases to $1.1 AUD = $1 SGD? (3 Marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Stocks For The Long Run

Authors: Jeremy Siegel

6th Edition

1264269803, 978-1264269808

More Books

Students also viewed these Finance questions

Question

Design an internal skills transfer system through tutoring.

Answered: 1 week ago