Hi David,

Got stuck in this problem:

A US bank has hedged exposure to euro appreciation with a fixed for fixed currency swap.  What is the value of swap to the US bank?

- $130M notional value, semi annual payments, 2 years remaining
- Interest rates:  EU, 2.7%; US 2.5% at all maturities
- Interest payments:  euro debt, 4%, US debt, 3.5%
- Exchange rate:  $1.3/euro at swap inception, $1.2/euro currently.

a.  $30.002M
b.  $ 9.507M
c.  - $ 9.507M
d.  - $30.002M

The answer is b.  I do not have problem arriving at that value but I think it has to be negative (item c), because, as the US bank does not want the euro to appreciate means that it has a euro liability that has been hedged by the swap.  In this case, the US bank is set to pay $, receive euro and will be paying the $ leg value of $132M and will be receiving the euro leg converted into dollar of $122.493. What do you think?

Thanks so much.

Hi Chinquee,

I input into my swap XLS: https://www.editgrid.com/bt/admin/forum1_currency_swap
I got -$9.04, consistent with you answer (c).
(although, can you identify the difference, I use continuous discounting, but switching to annual will unlikely make much difference).

I agree with you, “in this case, the US bank is set to pay $, receive euro and will be paying the $ leg value.” Put another way, to hedge agains Euro appreciation, the bank wants to receive Euro in the swap (e.g., higher liability in Euros will be hedged by the receipt of appreciated Euros). So, we agree, this should be a PAY DOLLAR, RECEIVE EUROS currency swap (for the US bank). Appropriate to the hedge, the swap becomes more valuable with Euro appreciation.

And, I get a value of negative $9.04

So, I agree. Are able to tell the difference between -9.50 and -9.04? It bugs me i don’t match exactly.

Thanks, David

...oh, i realized the difference, I was using the full annual coupon rate. Fixed in above.

Now i indeed get -$9.51. We are in total agreement! David

Yes, the coupon’s semi-annual :> Thanks so much!  Really really appreciate your effort.