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Answer: - $180,000
The value to the counterparty paying euros is the value of the USD leg received minus the USD value of the EUR leg paid. Using the flat term structures and the remaining 15-month life, the two legs are very close in value, but the USD leg is slightly less valuable than the EUR leg when converted at the current spot rate. So the swap value to the party paying euros is approximately **-$180,000**. ### Key idea A currency swap is valued like two bond positions: - receive leg = value of the bond you receive - pay leg = value of the bond you pay Then convert the foreign-currency leg into USD using the spot rate and subtract.
Author: Manit Arora
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Question 1.1. Currency swap valuation
A dollar/euro (USD/EUR) currency swap has a remaining life of 15 months. Once a year, interest at 7.0% on USD $70 million is exchanged for interest at 4.0% on EUR 50 million. Today, the swap rate term structure is flat at all maturities in both the United States and the eurozone: 4.0% in the US and 5.0% in the eurozone. All interest rates are quoted with annual compounding. The current EUR/USD is $1.50; i.e., $1.50 USD per EUR. What is the value of the swap to the counterparty paying euros?
A
$180,000B
$760,000
C
$5.08 million
D
$10.16 million
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