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 = 3% 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 = 1.39, 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

Present value of GBP payments as per below table is GBP 390,295.33. we need to convert it to USD using current exchange rate.

PV of GBP payments in USD = GBP 390,295.33*1.39 USD/GBP = $542,510.51

value of currency swap for company A = $542,510.51 - $505,153.67 = $37,356.84

Year	Notional	USD Payment	Present value	Notional	GBP Payment	Present value
1	$2,265,000	$135,900	$131,941.75	£1,500,000	£105,000	£101,941.75
2	$2,265,000	$135,900	$128,098.78	£1,500,000	£105,000	£98,972.57
3	$2,265,000	$135,900	$124,367.75	£1,500,000	£105,000	£96,089.87
4	$2,265,000	$135,900	$120,745.39	£1,500,000	£105,000	£93,291.14
Total			$505,153.67			£390,295.33

Formulas