Question
Some time ago, a trader entered into a currency swap agreement involving UK pounds and Euros.The swap will last three more years and requires the
Some time ago, a trader entered into a currency swap agreement involving UK pounds and Euros.The swap will last three more years and requires the traders to make payments at the end of each year.The trader has agreed to pay 6% per year in pounds and receives 5% per year in Euros.Payments are exchanged at the end of each year.The term structure of interest rates in both the UK and Europe is flat.The UK rate is equal to 5% and the rate in Europe is equal to 4% (both rates are based on continuous compounding).The principals in the two currencies are 100 million Euros and 80 million pounds.The current spot exchange rate is 1.2 Euros per UK pound.Using the above information, find the value of the currency swap for the trader in pounds.Value the swap as a portfolio of forward exchange rate agreements.
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