NOK/NZD swap arrangements (a) You are CFO for a company that borrows NOK 100M at 10%...

NOK/NZD swap arrangements

(a) You are CFO for a company that borrows NOK 100M at 10% for seven years, and you swap the load into NZD at a spot rate of NOK/NZD 4 and the sevenyear swap rates of 7% (NZD) and 8% (NOK). What are the payments on the loan, on the swap, and on the combination of them? Is there a gain if you could have borrowed NZD at 9%?

(b) The swap now has three years to go and your CEO asks you to estimate the value of the swap contract. To recap, your company has now an outstanding fixed-for-fixed NOK/NZD swap for NOK 100M based on the historic spot rate of NOK/NZD 4 and initial swap rates of 7% (NZD) and 8% (NOK). With three years to go and current rates at NOK/NZD 4.5, 6% (NZD) and 5% (NOK). What is the market value of the swap contract?

(c) Use the same data as in the previous part, except that now the NZD leg is a floating rate. The rate has just been reset. What is the market value of the swap?

Expert Solution

jeff jeffy answered 1 year ago

You have an outstanding fixed-for-fixed NOK/NZD swap for NOK 100 million, based on a historic spot...

You have an outstanding fixed-for-fixed NOK/NZD swap for NOK 100 million, based on a historic spot rate of NOK/NZD 4 and initial seven-year swap rates of 7% (NZD, outflow) and 8% (NOK, inflow). The swap now has three years to go, and the current rates at NOK/NZD 4.5, 6% p.a. (NZD three years), and 5% p.a. (NOK three years). What is the market value of the swap contract in NOK?

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NOK/NZD swap arrangements (a) You are CFO for a company that borrows NOK 100M at 10%...

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