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

Question

Quizplus · Accepted Answer

The value of the British pound bond underlying the swap is in millions of pounds 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

In a Fixed-For-Fixed Currency Swap,3% on a US Dollar Principal