Question
Question2[5+6+4=15marks]It'snotjustoilpricesthathavebeenvaryingwildly.TheCOVID19pandemiccausedaninitial'flighttoquality'withinvestorsseekingshelterintheUSdollar,seeingitstrengthenconsiderably.TheeffectwasshortlivedhoweverastheuncertainUSeconomicoutlooksubsequentlycausedtheUSdollartoweakenconsiderably.Combined,thishascausedlargemovementsinexchangeratesoverthelastfewmonths.Inthisregard,thefinancialinstitutionyouareworkingforhasacurrentpositioninacrosscurrencyinterestrateswapandanotherUSDcurrencyfuturesposition.Yourbosshasaskedyoutoevaluatethesetwopositions.TheSwapPosition27months(2.25years)ago,yourinstitutionenteredintoathreeyearcrosscurrencyinterestrateswapwithanAustralianretailchain.Theswapagreementwasoverthecounterwiththefollowingterms:yourinstitutionistopay6monthLIBOR+0.55%perannuminUSDandtoreceive2.25%perannum(withsemiannualcompounding)inAUD.Paymentsaresemi annualandonanotionalprincipalofAUD20million.The6monthLIBORrateandthespotexchangerateatvariousdatesoverthelast27monthsareshowninthetablebelow:Dateofobservation6monthLIBORrateobservedSpotexchangerateobserved(AUDfor1USD)t=0(contractinitiation)1.74%1.3152t=6months2.06%1.3949t=12months2.31%1.4156t=18months1.88%1.4562t=24months1.36%1.5908t=27months(today)1.12%1.4080(a) Computethecashflowpaidandreceivedbyyourfinancialinstitutiononeachpaymentdateoftheswap(i.e.,att=0,6,12,18,and24months).(b) Unfortunatelyforyouandyourinstitution,thecounterpartytotheswap(theAustralianretailcompany)hasjustfiledforbankruptcywith9monthsremainingontheswapagreement.Determinethecurrentvalueoftheswapagreement(andultimatelythecost)toyourinstitution.Youshouldassumethatthecurrentinterestrateis0.36%perannuminAUDand0.25%perannuminUSD(withcontinuouscompounding)forallmaturities.TheFuturesPosition(c) Worriedaboutavolatileexchangerate,threemonthsagoyourinstitutionalsoenteredintoashortpositioninoneyearcurrencyfuturescontractsonUSD15million.Atthetime,theinterestratewas0.63%perannuminAUDand0.45%perannuminUSD(withcontinuouscompounding)forallmaturities.Yourbossasksyouthefollowingquestions:i. Whatwasthevalueofthefuturespositionthreemonthsago?ii. Ifweclosedoutthepositiontoday,whatwouldbetheprofit/lossonthefuturestransaction?Note:youwillneedthespotexchangeratethreemonthsago,thecurrentspotexchangeratetoday,andthecurrentinterestratesinAUDandUSD,allstatedabove,toanswer.Question2[5+6+4=15marks]It'snotjustoilpricesthathavebeenvaryingwildly.TheCOVID19pandemiccausedaninitial'flighttoquality'withinvestorsseekingshelterintheUSdollar,seeingitstrengthenconsiderably.TheeffectwasshortlivedhoweverastheuncertainUSeconomicoutlooksubsequentlycausedtheUSdollartoweakenconsiderably.Combined,thishascausedlargemovementsinexchangeratesoverthelastfewmonths.Inthisregard,thefinancialinstitutionyouareworkingforhasacurrentpositioninacrosscurrencyinterestrateswapandanotherUSDcurrencyfuturesposition.Yourbosshasaskedyoutoevaluatethesetwopositions.TheSwapPosition27months(2.25years)ago,yourinstitutionenteredintoathreeyearcrosscurrencyinterestrateswapwithanAustralianretailchain.Theswapagreementwasoverthecounterwiththefollowingterms:yourinstitutionistopay6monthLIBOR+0.55%perannuminUSDandtoreceive2.25%perannum(withsemiannualcompounding)inAUD.Paymentsaresemi annualandonanotionalprincipalofAUD20million.The6monthLIBORrateandthespotexchangerateatvariousdatesoverthelast27monthsareshowninthetablebelow:Dateofobservation6monthLIBORrateobservedSpotexchangerateobserved(AUDfor1USD)t=0(contractinitiation)1.74%1.3152t=6months2.06%1.3949t=12months2.31%1.4156t=18months1.88%1.4562t=24months1.36%1.5908t=27months(today)1.12%1.4080(a) Computethecashflowpaidandreceivedbyyourfinancialinstitutiononeachpaymentdateoftheswap(i.e.,att=0,6,12,18,and24months).(b) Unfortunatelyforyouandyourinstitution,thecounterpartytotheswap(theAustralianretailcompany)hasjustfiledforbankruptcywith9monthsremainingontheswapagreement.Determinethecurrentvalueoftheswapagreement(andultimatelythecost)toyourinstitution.Youshouldassumethatthecurrentinterestrateis0.36%perannuminAUDand0.25%perannuminUSD(withcontinuouscompounding)forallmaturities.TheFuturesPosition(c) Worriedaboutavolatileexchangerate,threemonthsagoyourinstitutionalsoenteredintoashortpositioninoneyearcurrencyfuturescontractsonUSD15million.Atthetime,theinterestratewas0.63%perannuminAUDand0.45%perannuminUSD(withcontinuouscompounding)forallmaturities.Yourbossasksyouthefollowingquestions:i. Whatwasthevalueofthefuturespositionthreemonthsago?ii. Ifweclosedoutthepositiontoday,whatwouldbetheprofit/lossonthefuturestransaction?Note:youwillneedthespotexchangeratethreemonthsago,thecurrentspotexchangeratetoday,andthecurrentinterestratesinAUDandUSD,allstatedabove,toanswer.
Question2[5+6+4=15marks]It'snotjustoilpricesthathavebeenvaryingwildly.TheCOVID19pandemiccausedaninitial'flighttoquality'withinvestorsseekingshelterintheUSdollar,seeingitstrengthenconsiderably.TheeffectwasshortlivedhoweverastheuncertainUSeconomicoutlooksubsequentlycausedtheUSdollartoweakenconsiderably.Combined,thishascausedlargemovementsinexchangeratesoverthelastfewmonths.Inthisregard,thefinancialinstitutionyouareworkingforhasacurrentpositioninacrosscurrencyinterestrateswapandanotherUSDcurrencyfuturesposition.Yourbosshasaskedyoutoevaluatethesetwopositions.TheSwapPosition27months(2.25years)ago,yourinstitutionenteredintoathreeyearcrosscurrencyinterestrateswapwithanAustralianretailchain.Theswapagreementwasoverthecounterwiththefollowingterms:yourinstitutionistopay6monthLIBOR+0.55%perannuminUSDandtoreceive2.25%perannum(withsemiannualcompounding)inAUD.Paymentsaresemi annualandonanotionalprincipalofAUD20million.The6monthLIBORrateandthespotexchangerateatvariousdatesoverthelast27monthsareshowninthetablebelow:Dateofobservation6monthLIBORrateobservedSpotexchangerateobserved(AUDfor1USD)t=0(contractinitiation)1.74%1.3152t=6months2.06%1.3949t=12months2.31%1.4156t=18months1.88%1.4562t=24months1.36%1.5908t=27months(today)1.12%1.4080(a) Computethecashflowpaidandreceivedbyyourfinancialinstitutiononeachpaymentdateoftheswap(i.e.,att=0,6,12,18,and24months).(b) Unfortunatelyforyouandyourinstitution,thecounterpartytotheswap(theAustralianretailcompany)hasjustfiledforbankruptcywith9monthsremainingontheswapagreement.Determinethecurrentvalueoftheswapagreement(andultimatelythecost)toyourinstitution.Youshouldassumethatthecurrentinterestrateis0.36%perannuminAUDand0.25%perannuminUSD(withcontinuouscompounding)forallmaturities.TheFuturesPosition(c) Worriedaboutavolatileexchangerate,threemonthsagoyourinstitutionalsoenteredintoashortpositioninoneyearcurrencyfuturescontractsonUSD15million.Atthetime,theinterestratewas0.63%perannuminAUDand0.45%perannuminUSD(withcontinuouscompounding)forallmaturities.Yourbossasksyouthefollowingquestions:i. Whatwasthevalueofthefuturespositionthreemonthsago?ii. Ifweclosedoutthepositiontoday,whatwouldbetheprofit/lossonthefuturestransaction?Note:youwillneedthespotexchangeratethreemonthsago,thecurrentspotexchangeratetoday,andthecurrentinterestratesinAUDandUSD,allstatedabove,toanswer.Question2[5+6+4=15marks]It'snotjustoilpricesthathavebeenvaryingwildly.TheCOVID19pandemiccausedaninitial'flighttoquality'withinvestorsseekingshelterintheUSdollar,seeingitstrengthenconsiderably.TheeffectwasshortlivedhoweverastheuncertainUSeconomicoutlooksubsequentlycausedtheUSdollartoweakenconsiderably.Combined,thishascausedlargemovementsinexchangeratesoverthelastfewmonths.Inthisregard,thefinancialinstitutionyouareworkingforhasacurrentpositioninacrosscurrencyinterestrateswapandanotherUSDcurrencyfuturesposition.Yourbosshasaskedyoutoevaluatethesetwopositions.TheSwapPosition27months(2.25years)ago,yourinstitutionenteredintoathreeyearcrosscurrencyinterestrateswapwithanAustralianretailchain.Theswapagreementwasoverthecounterwiththefollowingterms:yourinstitutionistopay6monthLIBOR+0.55%perannuminUSDandtoreceive2.25%perannum(withsemiannualcompounding)inAUD.Paymentsaresemi annualandonanotionalprincipalofAUD20million.The6monthLIBORrateandthespotexchangerateatvariousdatesoverthelast27monthsareshowninthetablebelow:Dateofobservation6monthLIBORrateobservedSpotexchangerateobserved(AUDfor1USD)t=0(contractinitiation)1.74%1.3152t=6months2.06%1.3949t=12months2.31%1.4156t=18months1.88%1.4562t=24months1.36%1.5908t=27months(today)1.12%1.4080(a) Computethecashflowpaidandreceivedbyyourfinancialinstitutiononeachpaymentdateoftheswap(i.e.,att=0,6,12,18,and24months).(b) Unfortunatelyforyouandyourinstitution,thecounterpartytotheswap(theAustralianretailcompany)hasjustfiledforbankruptcywith9monthsremainingontheswapagreement.Determinethecurrentvalueoftheswapagreement(andultimatelythecost)toyourinstitution.Youshouldassumethatthecurrentinterestrateis0.36%perannuminAUDand0.25%perannuminUSD(withcontinuouscompounding)forallmaturities.TheFuturesPosition(c) Worriedaboutavolatileexchangerate,threemonthsagoyourinstitutionalsoenteredintoashortpositioninoneyearcurrencyfuturescontractsonUSD15million.Atthetime,theinterestratewas0.63%perannuminAUDand0.45%perannuminUSD(withcontinuouscompounding)forallmaturities.Yourbossasksyouthefollowingquestions:i. Whatwasthevalueofthefuturespositionthreemonthsago?ii. Ifweclosedoutthepositiontoday,whatwouldbetheprofit/lossonthefuturestransaction?Note:youwillneedthespotexchangeratethreemonthsago,thecurrentspotexchangeratetoday,andthecurrentinterestratesinAUDandUSD,allstatedabove,toanswer.
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