Suppose that the term structure of interest rates is flat in the United States and...
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Suppose that the term structure of interest rates is flat in the United States and Australia. The USD interest rate is 7% per annum and AUD rate is 9% per annum. The current exchange rate is 0.62USD/AUD. In a swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum is USD. The principles in the two currencies are $12 million USD and $20 AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last two more years. Assume all interest rates are continuously compounded. What is the today's value of swap to the financial institution (in millions of dollars)? The answer is 0.795. I want to know the process.
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