Question 4 Given the following swap rates, Charlton Ferguson, Chief Finance Officer of Red Devils Ltd., decides...

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Finance

Question 4
Given the following swap rates, Charlton Ferguson, ChiefFinance Officer of Red Devils Ltd., decides to enter into afour-year currency swap agreement to receive pounds and pay euros,on a notional principal of £33,000,000. The spot exchange rate atthe time of the swap is €1.8300/£.
          SwapRates
         Years           £bid £ask           € bid € ask
         2                 4.08%4.28%          3.10% 3.30%
         3                 4.18%4.33%          3.25% 3.48%
         4                 4.23%4.48%          3.30% 3.60%
a)       Calculate allprincipal and interest payments, in both pounds and euros, over thelife of the currency swap agreement.
b)       Assuming that twoyears into the swap agreement, Charlton Ferguson decides to unwindthe swap agreement and settle it in pounds. Assume that a two-yearfixed rate of interest on pounds is 4.50%, a two-year fixed rate ofinterest on euros is 3.80%, and the spot rate of exchange is now€1.7788/£. Find the net settlement amount of unwinding the swap andstate who pays to whom the net settlement amount (Red Devils Ltd.pays to swap dealer or swap dealer pays to Red DevilsLtd.).

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a currency swap is a contract under which a particular amountof one currency is exchanged for another currency at apredetermined ratePrinciple amount 33000000spot exchange rate 18300swap rate for 2 years with bid and ask at 408 and 428respectively in case swap contract is for Therefore the maturity value of the contract at bid price of408principle 1bid rateduration 3574773312Therefore the interest received over two yearsmaturity value principle See Answer

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Question 4Given the following swap rates, Charlton Ferguson, ChiefFinance Officer of Red Devils Ltd., decides to enter into afour-year currency swap agreement to receive pounds and pay euros,on a notional principal of £33,000,000. The spot exchange rate atthe time of the swap is €1.8300/£. SwapRates Years £bid £ask € bid € ask 2 4.08%4.28% 3.10% 3.30% 3 4.18%4.33% 3.25% 3.48% 4 4.23%4.48% 3.30% 3.60%a) Calculate allprincipal and interest payments, in both pounds and euros, over thelife of the currency swap agreement.b) Assuming that twoyears into the swap agreement, Charlton Ferguson decides to unwindthe swap agreement and settle it in pounds. Assume that a two-yearfixed rate of interest on pounds is 4.50%, a two-year fixed rate ofinterest on euros is 3.80%, and the spot rate of exchange is now€1.7788/£. Find the net settlement amount of unwinding the swap andstate who pays to whom the net settlement amount (Red Devils Ltd.pays to swap dealer or swap dealer pays to Red DevilsLtd.).