Suppose that the continuously compounded risk-free interest rates for 1-year, 2-year, and 3-year investments in Japan are
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Question:
Suppose that the continuously compounded risk-free interest rates for 1-year, 2-year, and 3-year investments in Japan are 3.6%, 3.9%, and 4.1% per annum, respectively. Suppose further that the continuously compounded risk-free interest rates for 1-year, 2-year, and 3-year investments in the United States are 2.8%, 3.2%, and 3.5% per annum, respectively. A financial institution has entered into a currency swap in which it receives 4.5% per annum in yen and pays 3.9% per annum in dollars once a year. The principals in the two currencies are $50 million and 6,000 million yen. The swap will last for another three years, and the current exchange rate is 115 yen per dollar.
What is the value of the swap (in $ millions)?
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