Some time ago, a bank entered into a currency swap in which it pays 2% per annum with annual compounding in HK Dollars (HKD) and receives 5% per annum with annual compounding in US Dollars (USD) once a year. The principal amounts are HK$8 million and USD$1 million. The swap will last for another 3 years and the current exchange rate is 7.85 HKD per USD. Suppose that all HKD LIBOR/swap zero rates are 1.2% per annum and all USD LIBOR/swap zero rates are 3% per annum (both with continuous compounding).

(a) A currency swap can be valued as the difference between two bonds. Use this method to compute the value of this currency swap for the bank in USD now.

(b) A currency swap can be valued as a portfolio of forward contracts. Use this method to compute the value of this currency swap for the bank in USD now.

***The method name is just right at the front of the question, for (a) and for (b)

Some time ago, a bank entered into a currency swap in which it pays 2% per annum with annual compounding in HK Dollars (HKD) and receives 5% per annum with annual compounding in US Dollars (USD) once a year. The principal amounts are HK$8 million and USD$1 million. The swap will last for another 3 years and the current exchange rate is 7.85 HKD per USD. Suppose that all HKD LIBOR/swap zero rates are 1.2% per annum and all USD LIBOR/swap zero rates are 3% per annum (both with continuous compounding). (a) A currency swap can be valued as the difference between two bonds. Use this method to compute the value of this currency swap for the bank in USD now. (b) A currency swap can be valued as a portfolio of forward contracts. Use this method to compute the value of this currency swap for the bank in USD now. Some time ago, a bank entered into a currency swap in which it pays 2% per annum with annual compounding in HK Dollars (HKD) and receives 5% per annum with annual compounding in US Dollars (USD) once a year. The principal amounts are HK$8 million and USD$1 million. The swap will last for another 3 years and the current exchange rate is 7.85 HKD per USD. Suppose that all HKD LIBOR/swap zero rates are 1.2% per annum and all USD LIBOR/swap zero rates are 3% per annum (both with continuous compounding). (a) A currency swap can be valued as the difference between two bonds. Use this method to compute the value of this currency swap for the bank in USD now. (b) A currency swap can be valued as a portfolio of forward contracts. Use this method to compute the value of this currency swap for the bank in USD now