Suppose that the term structure of interest rates is flat in the US and UK....
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Suppose that the term structure of interest rates is flat in the US and UK. The USD interest rate is 2.5% per annum and the GBP rate is 2.9% p.a. Under the terms of a swap agreement, a financial institution pays 3% p.a. in GBP and receives 2.6% p.a. in USD. The principals in the two currencies are GBP20 million and USD32 million. Payments are exchanged every year, with one exchange having just taken place. The swap will last 3 more years NOTE: 1 USD = 0.8 GBP
ii) Show the payments to be made in a table and then calculate the value of the swap to the financial institution. Assume all interest rates are compounded continuously.
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