Use the following information to determine the value of a currency swap in US dollars. Under the terms of the agreement payments are exchanged on a quarterly basis and the US based swap dealer pays 2% in pounds and receives 4% in US dollars (both rates are per annum based on quarterly compounding). The current exchange rate is $1.3 USD for each UK pound. The term structure of interest rates in the United States and the UK is flat and the interest rate (based on continuous compounding) in both countries is currently 5% per annum. The principals in the two countries are $100 million dollars and 80 million pounds. Assume that the next exchange of payments is in 3 months and that the swap will last one more year from today.
Use the following information to determine the value of a currency swap in US dollars. Under the terms of the agreement payments are exchanged on a quarterly basis and the US based swap dealer pays 2% in pounds and receives 4% in US dollars (both rates are per annum based on quarterly compounding). The current exchange rate is $1.3 USD for each UK pound. The term structure of interest rates in the United States and the UK is flat and the interest rate (based on continuous compounding) in both countries is currently 5% per annum. The principals in the two countries are $100 million dollars and 80 million pounds. Assume that the next exchange of payments is in 3 months and that the swap will last one more year from today.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Use the following information to determine the value of a currency swap in US dollars. Under the
terms of the agreement payments are exchanged on a quarterly basis and the US based swap dealer
pays 2% in pounds and receives 4% in US dollars (both rates are per annum based on quarterly
compounding). The current exchange rate is $1.3 USD for each UK pound. The term structure of
interest rates in the United States and the UK is flat and the interest rate (based on continuous
compounding) in both countries is currently 5% per annum. The principals in the two countries are
$100 million dollars and 80 million pounds. Assume that the next exchange of payments is in 3
months and that the swap will last one more year from today. e
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