You enter into a 3-year fixed-for-fixed currency swap, such that the cash-flow stream you are paying...

90.2K

Verified Solution

Question

Finance

You enter into a 3-year fixed-for-fixed currency swap, such thatthe cash-flow stream you are paying is in U.S. dollars and thecash-flow stream you are receiving is in euros. The swap contractis based on a notional principal of $1 million. The contract is anat-market swap, the swap rates are 4.13% for dollars and 2.96% foreuros, and the spot exchange rate is €1 = $1.23 $/ at origination?a. What will be your cash flows in each of the next three years?(Assume the notional principal is exchanged in four years as wellas annual payments) b. Immediately after the second annualpayment-exchange, you want to terminate the contract. At that time,1-year interest rates are 4.96% for dollars and 5.18% for euros,and the exchange rate is €1= $1.29. What should you receive (orpay) upon termination? (That is, how much is the contract nowworth?)

Answer & Explanation Solved by verified expert

3.7 Ratings (481 Votes)

Parta Notional principal in Euro 1 mn converted at exchange rate of 1 Euro 123 1 123 Euro 08130 mn In each of the next three years you will pay interest in US dollars term So cash outflow from you each year IUS x PUS 413 x 1 mn 00413 mn You will receive interest in Euros So cash inflow for you each See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

You enter into a 3-year fixed-for-fixed currency swap, such thatthe cash-flow stream you are paying is in U.S. dollars and thecash-flow stream you are receiving is in euros. The swap contractis based on a notional principal of $1 million. The contract is anat-market swap, the swap rates are 4.13% for dollars and 2.96% foreuros, and the spot exchange rate is €1 = $1.23 $/ at origination?a. What will be your cash flows in each of the next three years?(Assume the notional principal is exchanged in four years as wellas annual payments) b. Immediately after the second annualpayment-exchange, you want to terminate the contract. At that time,1-year interest rates are 4.96% for dollars and 5.18% for euros,and the exchange rate is €1= $1.29. What should you receive (orpay) upon termination? (That is, how much is the contract nowworth?)