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Suppose that the term structure of risk - free interest rates is flat in the United States andAustralia. The USD interest rate is 7 %
Suppose that the term structure of riskfree interest rates is flat in the United States andAustralia. The USD interest rate is per annum and the AUD rate is per annum. Thecurrent value of the AUD is USD. Under the terms of a swap agreement, a financialinstitution pays per annum in AUD and receives per annum in USD. The principals inthe two currencies are $ million USD and million AUD. Payments are exchanged everyyear, with one exchange having just taken place. The swap will last two more years. What is thevalue of the swap to the financial institution? Assume all interest rates are continuouslycompounded.
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