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In a fixed-for-fixed currency swap, 3% on a US dollar principal of $150 million is received and 4% on a British pound principal of 100 million pounds is paid. The current exchange rate is 1.55 dollar per pound. Interest rates in both countries for all maturities are currently 5% (continuously compounded). Payments are exchanged every year. The swap has 2.5 years left in its life. What is the value of the swap?
A. −$7.15
B.−$8.15
C.−$9.15
D.−$10.15
A. −$7.15
B.−$8.15
C.−$9.15
D.−$10.15
Answer: C
The value of the British pound bond underlying the swap is in millions of pounds
4e-0.05×0.5+4e-0.05×1.5+104e-0.05×2.5 = 99.39
The value of the U.S. dollar bond is in millions of dollars
4.5e-0.05×0.5+4.5e-0.05×1.5+154.5e-0.05×2.5 = 144.91
The value of the swap is 144.91 – 99.39×1.55 = –9.15
The value of the British pound bond underlying the swap is in millions of pounds
4e-0.05×0.5+4e-0.05×1.5+104e-0.05×2.5 = 99.39
The value of the U.S. dollar bond is in millions of dollars
4.5e-0.05×0.5+4.5e-0.05×1.5+154.5e-0.05×2.5 = 144.91
The value of the swap is 144.91 – 99.39×1.55 = –9.15
Karteninfo:
Autor: CoboCards-User
Oberthema: Finance & Investment
Thema: Derivatives
Veröffentlicht: 27.10.2015
The calculation of the swap's value is impressive, especially how the cash flows are discounted using continuously compounded rates to determine the present value. It’s clear that understanding the currency exchange and interest rates plays a key role in these evaluations. http://retrobowl-game.io/