Explanation:
The present value of USD payment for two years is
12` \times 1.055^{-1} + 132 \times 1.055^{-2} = \text{USD } 129.38 \text{ million}
The present value of GBP payment for two years is $`$6.4` \times 1.068^{-1} + 86.4 \times 1.068^{-2} = \text{GBP } 81.74 \text{ million}Value of currency swap = PV of USD payments − Spot exchange rate × PV of GBP payments
= $129.38 - (1.26 \times 81.74) = ` million
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Q.30 Two banks, the American Dream Bank (AD) and the British Royal Bank (BR), have entered into a 2-year currency swap agreement with annual payments, where AD agreed to pay 8% in British pound (GBP) on the principal amount of GBP 80 million to BR. In addition, BR agreed to pay 10% to AD on the principal of $120 million. The exchange rate is USD 1.26 per GBP. Suppose that the interest rate in the United States and Great Britain are flat at 5.5% and 6.8%, respectively, determine the value of the currency swap to American Dream Bank in USD.
A
USD 30.45 million.
B
USD 21.69 million.
C
USD 26.39 million.
D
USD 20.40 million.