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Suppose the term structure of interest rates isat in both the US and Australia at 7% and 9% respectively (continuously compounded zero rates - use
Suppose the term structure of interest rates isat in both the US and Australia at 7% and 9%
respectively (continuously compounded zero rates - use exponential formula for discounting). The current exchange rate is 0.62 USD/ AUD. The swap is for two more years with annual payments involving paying 8% (annually) in AUD and receiving 4% (annually) in USD. The principal amounts are $12 million USD and $20 million AUD.
1. Is the swap long or short a US bond? What about an AUD bond?
2. Value the swap in USD.
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