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You enetered into a currency swap that has 4.25 years left until termination. You receive 4.3%...

You enetered into a currency swap that has 4.25 years left until termination. You receive 4.3% on $10 million and pay 3.8% on 9.5 million euros each settlement date. Current exchange rate is $1.10/1 Euros. The interest rates are listed below for the USD and EUR all quoted per annum with continuous compounding. What is the value of your swap today?

YEAR         USD       EUR

.25            3%          3.5%

1.25          3.5%         4%

2.25           4%           4%

3.25           4.25%       4.5%

4.25           4.25%       4.75%

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Expert Solution

Please see the table below. Please see the second row to understand the mathematics.

Year USD EUR Receive in $ mn Pay in EUR mn Exchange rate ($ / Eur) Pay in $ Net cash flows PV factor PV of net cash flows
t A B C = 4.3% x 10 D = 3.8% x 9.5 E = 1.1 x e(A – B)t F = D x E G = C - F H = e-A x t G x H
0.25 3.00% 3.50%           0.430000           0.361000            1.098626     0.396604      0.033396     0.992528      0.033147
1.25 3.50% 4.00%           0.430000           0.361000            1.093146     0.394626      0.035374     0.957193      0.033860
2.25 4.00% 4.00%           0.430000           0.361000            1.100000     0.397100      0.032900     0.913931      0.030068
3.25 4.25% 4.50%           0.430000           0.361000            1.091099     0.393887      0.036113     0.870990      0.031454
4.25 4.25% 4.75%           0.430000           0.361000            1.076872     0.388751      0.041249     0.834748      0.034433
Total      0.162962

Value of the swap today = Total PV of all the future net cash flows = $ 0.162962 million = $  162,961.95 (Please round it off as per your requirement)

jeff jeffy answered 4 days ago
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