Question

Ganado Corporation entered into a​ 3-year cross-currency interest rate swap to receive U.S. dollars and pay Swiss francs.​ Ganado, however, decided to unwind the swap after one year—thereby having two years left on the settlement costs of unwinding the swap after one year. Repeat the calculations for​ unwinding, but assume that the following rates now​ apply:

Assumptions	Values	Swap Rates	3-Year Bid	3-Year Ask
Notional principal	$11,000,000	Original: US dollar	5.56%	5.59%
Original spot rate (SFr/$)	1.5	Original: Swiss franc	1.93%	2.01%
New (1-year later) spot (SFr/$)	1.556
New fixed US$ interest	5.20%
New fixed Swiss franc interest	2.25%

Answer 1

The Swap rates agreed were : to Receive 5.56% on US Dollars notional amount and pay  2.01% on Swiss franc Notional amount (let us assume annual exchange of amounts in the swap)

Original principal = $11000000 and SFr = 11000000/1.5 = SFr 7,333,333.33

Annual Swap payment on Dollars = $11000000* 5.56% =$611600

Annual Swap payment on SFr = SFr 7333333.33* 2.01% =SFr 147400

So,the value of the Swap can be measured by the value of the two Currency bonds remaining

Value of Dollar Bond = 611600/1.052+611600/1.052^2+11000000/1.052^2 = $11073424.51

Value of SFr Bond = 147400/1.0225+147400/1.0225^2+7333333.33/1.0225^2 = SFr 7299286.67

So, Value of Swap to Ganado = $11073424.51 - SFr 7299286.67

= $11073424.51 - $7299286.67*1.556

= - $284265.54

So, the cost of Winding the swap to Ganado is $284265.54