3. Suppose that U.S $ interest rates is 9% per annum and the euro interest rate

Question

3. Suppose that U.S $ interest rates is 9% per annum and the euro interest rate is 7% per annum. The current value of the U.S. $ is €0.62. Consider a financial institution engaging in a swap agreement to pay 8% per annum in dollar and receives 4% per annum in euro. The principals in the two currencies are €12 million and $20 million. Payments are exchanged every year, with one exchange having just taken place. Assume that all interest rates are continuously compounding and that the term structure of interest rates is flat in both regions. The swap will last two more years. The value of the swap to the financial institution is: Answer -$19.5 million + €795,000 - €795,000 +€11.297 3. Suppose that U.S $ interest rates is 9% per annum and the euro interest rate is 7% per annum. The current value of the U.S. $ is €0.62. Consider a financial institution engaging in a swap agreement to pay 8% per annum in dollar and receives 4% per annum in euro. The principals in the two currencies are €12 million and $20 million. Payments are exchanged every year, with one exchange having just taken place. Assume that all interest rates are continuously compounding and that the term structure of interest rates is flat in both regions. The swap will last two more years. The value of the swap to the financial institution is: -$19.5 million + €795,000 - €795,000 +€11.297 -$19.5 million + €795,000 - €795,000 +€11.297

Explanation / Answer

795,000

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