Question

a. Find the upcoming net payment in a plain vanilla interest rate swap in which the...

a. Find the upcoming net payment in a plain vanilla interest rate swap in which the fixed party pays 10 percent and the floating rate for the upcoming payment is 9.5 percent. The notional amount is $20 million and payments are based on the assumption of 180 days in the payment period and 360 days in a year.

b. The present value of the series of dollar payments in a currency swap per $1 notional amount 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 amount of $100 million and €105 million, find the market value of the swap from the perspective of the party paying euros and receiving dollars.

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Answer:

a)

b)

In this context, the party under consideration pays euro and receives $.

$ Notional = $ 100 million and Euro Notional = € 105 million

PV of Cash Flows per $ = $ 0.03 and PV of Cash Flows per € = € 0.0225

PV of Cash Inflows ($) = 100 x 0.03 = $ 3 million and PV of Cash Outflows (€) = 105 x 0.0225 = €2.3625 million

Current Exchange Rate = $ 1.05 / €

Market Value of Swap = Net Cash Inflow = 3 - 2.3625 x 1.05 = $ 0.519375 million or $ 519375

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