Question

Company A makes annual USD payments of 6% on a notional of USD 2,265,000. Company A receives annual GBP payments of 7% on a notional of GBP 1,500,000. Assume that the USD and GBP interest rates are rUSD = 4% and rGBP = 6%. The swap currently has 4 years until it matures. The next cash flow exchange will occur one year from today. If the current USD/GBP spot rate XNUSD/GBP = 1.45, what is the value of this currency swap for company A?

Answer 1

value of currency swap for company A = Present value of GBP payments in terms of USD - Present value of USD payments

Present value of payment = (notional*payment rate)/(1+currency interest rate)^period

From the below table, we get Present value of GBP payments 363,836.09. we need to convert it to USD value using current exchange rate.

Present value of GBP payments in terms of USD = GBP 363,836.09*1.45 USD/GBP = $527,562.33

value of currency swap for company A = $527,562.33 - $493,302.76 = $34,259.57

Year	Notional	USD Payment	Present value	Notional	GBP Payment	Present value
1	$2,265,000	$135,900	$130,673.08	£1,500,000	£105,000	£99,056.60
2	$2,265,000	$135,900	$125,647.19	£1,500,000	£105,000	£93,449.63
3	$2,265,000	$135,900	$120,814.61	£1,500,000	£105,000	£88,160.02
4	$2,265,000	$135,900	$116,167.89	£1,500,000	£105,000	£83,169.83
Total			$493,302.76			£363,836.09

Formulas