4. (20 points) A U.S. corporation is considering entering into a currency swap t

Question

4. (20 points) A U.S. corporation is considering entering into a currency swap that will call for the firm to pay dollars and receive British pounds. The dollar notional amount will be $35 million. The swap will involve semiannual payments (180/360). The exchange rate is $1.60/pound. The term structure for the two currencies is as follows:

What is the appropriate pound notional amount?

b. What is the fixed rate in dollars?

c. What is the fixed rate in pounds?

d. If the company enters a pay dollars fixed, receive pounds fixed, what will be the first pair of payments for the swap?

e. Assume that 120 days have passed. The new exchange rate is $1.42/pound, and the new term structure is below. What is the value of the swap for a pay dollars fixed/receive pounds floating swap?

I need part e.

Explanation / Answer

Ans 8) D. The British firm pays dollar to the swap dealer and receives pounds from the dealer. The US firm pays pounds to the swap dealer and receive dollars.

Because the British firm operating in USA gets paid in the dollars but wants the payment in pounds, it will be prudent to engage a swap dealer who takes dollars and exchanges it with the pounds. Likewise, the USA firm operting in Britain gets paid in pounds but wants the payment in dollars. It will be a good idea to exchange the pounds in dollars with the help of swap dealer.

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