exercise: currency swap

Discussion in 'P1.T3. Financial Markets & Products (30%)' started by fullofquestions, Sep 28, 2009.

  1. fullofquestions

    fullofquestions New Member

    Consider the following currency swap: Counterparty A swaps 3% on 25 million
    USD for 7.5% on 20 million Sterling. There are now 18 months remaining in the
    swap, the term structures of interest rates are flat in both countries with USD
    rates currently at 4.25% and Sterling rates currently at 7.75%. The current
    Sterling/USD exchange rate is 1.65. Calculate the value of the swap. Use
    continuous compounding. Assume 6 months until the next annual coupon and
    use current market rates to discount.
    a. -1,237,500 USD
    b. -4,893,963 USD
    c. -7,422,044 USD (ANS)
    d. -8,250,000 USD

    First, it seems to me that this question takes a long time. Let me know if there is a faster way.

    Fist question: could someone confirm the mechanics of the transaction?
    T=+6months:
    Counterparty A pays 3% on 25M USD discounted at 4.25% annually = - 750Ke(-.0425/2) = -734,230.6
    Counterparty A receives 7.5% on 20M GBP discounted at 7.75% annually = 1.5Me(-.0775/2) = 1,442,986.8
    T=+12months:
    Counterparty A pays 3% on 25M USD discounted at 4.25% annually = - 750Ke(-.0425) = -718,792.8
    Counterparty A receives 7.5% on 20M GBP discounted at 7.75% annually = 1.5Me(-.0775) = 1,388,140.5
    T=+18months:
    Counterparty A pays 3% on 25M USD discounted at 4.25% annually = - 750Ke(-.0425*1.5) = -703,679.9
    Counterparty A receives 7.5% on 20M GBP discounted at 7.75% annually = 1.5Me(-.0775*1.5) = 1,335,378.9

    Total:
    Cpty A pays (2,156,703) USD
    Cpty A receives 4,166,506.25 @ 1.65 USD per 1 GBP = 2,525,155

    Adding these up is totally wrong. Any thoughts/tips?
  2. rahul.goyl

    rahul.goyl Member

    Hi David/FOQ
    Even I am not getting this correct, below are my calculation. Would need your help. I think FOQ is missing out on the Notional to be added at the last node. I tried adding notional but still away from the Answer.

    Fixed Disc Fac USD Floating Disc Fac GBP
    375000 0.97897419 367115.3214 750000 0.961991177 721493.3827
    750000 0.958390466 718792.8491 1500000 0.925427024 1388140.537
    26125000 0.93823953 24511507.72 22250000 0.890252632 19808121.07
    Pay 25597415.89 Rec 21917754.99
    36164295.73
    Ans : (-10566879.84)

    Thanks
    Rahul

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