Question
In: Finance
Company A makes annual USD payments of 6% on a notional of USD 2,265,000. Company A...
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?
Solutions
Expert Solution
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
jeff jeffy answered 2 months agoRelated Solutions
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