Explanation:
To value the currency swap:
Calculate present value of USD cash flows:
$10,000,000$10,000,000 = $275,000$275,000 × (e^(-0.04) + e^(-0.08) + e^(-0.12)) + $10,000,000 × e^(-0.12)Calculate present value of CAD cash flows:
Convert CAD to USD:
Swap value = PV(USD received) - PV(USD paid)
After calculations, the value is approximately $131,967.
Ultimate access to all questions.
Consider the following 3-year currency swap, which involves exchanging annual interest of 2.75% on 10 million US dollars for 3.75% on 15 million Canadian dollars. The spot rate is 1.52 CAD per USD. The term structure is flat in both countries. Calculate the value of the swap in USD if interest rates (continuous compounding) in Canada are 5% and in the United States are 4%. Round to the nearest dollar.
A
$152,000
B
$145,693
C
$131,967
D
$127,818
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