The present value of the series of dollar payments in a currency swap per $1 notional principal is $0.03.The present value of the series of euro payments in the same currency swap per €1 is €0.0225.The current exchange rate is $1.05 per euro.If the swap has a notional principal of $100 million and €105 million,find the market value of the swap from the perspective of the party paying euros and receiving dollars.
A)$519,375
B)-$2,480,625
C)$3,000,000
D)-$3,000,000
E)-$519,375

Question

Quizplus · Accepted Answer

The market value of the swap is calculated by finding the difference in present values of the dollar and euro payments, converted to the same currency. The dollar payments have a present value of $3 million ($0.03 * $100 million), and the euro payments have a present value of €2,362,500 (€0.0225 * €105 million), which is equivalent to $2,480,625 (€2,362,500 * $1.05). The market value from the perspective of the party paying euros is $3,000,000 - $2,480,625 = $519,375.

The Present Value of the Series of Dollar Payments in a Currency