Question
Suppose that the term structure of interest rates is flat in the United States and in the United Kingdom. The USD interest rate is 5%
Suppose that the term structure of interest rates is flat in the United States and in the United Kingdom. The USD interest rate is 5% per annum and the GBP interest rate is 6% per annum. The current FX spot rate is 1.498 USD/GBP. Under the terms of a swap agreement, a financial institution pays 6% per annum in USD and receives 8% per annum in GBP. The swap principals in the two currencies are 15 million USD and 10 million GBP. Payments are exchanged every year with one exchange having just taken place. The swap will last four more years.
- What is the amount of the annual payments in GBP using the current FX spot rate?
- What is the present value of all the future incoming payment streams to the financial institution?
- What is the GBP value of the swap to the financial institution?
- What is the implied contractual exchange rate of the final currency exchange?
(Answer with Steps please)
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