Explanation:
The basic formula is
B_{\text{USD}} = 3.64 / 1.02 + 133.64 / 1.0225^2 = 3.57 + 127.82 = \`131.39` $
V_{\text{swap}}(\text{USD}) = B_{\text{USD}} - (S_0 \times B_{\text{EUR}}) = 131.39 - (1.33 \times 98.15) = \`131.39 - \130.54` = \`0.85` \text{ million} $
(Book 3, Module 46.3, LO 46.j)
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Question 69
Stampede Capital Management has entered into a currency swap with Polar Investments in which Stampede pays 3.5% per annum in euros and receives 2.8% per annum in dollars. Stampede pays a principal amount of $130 million to Polar, while Polar pays €100 million to Stampede at the inception of the swap. The yield curve in both Germany and the United States is upward-sloping with the following interest rates:
| 1-Year | 2-Year | |
|---|---|---|
| Germany | 4.00% | 4.50% |
| United States | 2.00% | 2.25% |
The swap will last for another two years, and the current exchange rate is $1.33 per €1. What is the value of the currency swap to Stampede?
A
$0.21 million.
B
$0.54 million.
C
$0.85 million.
D
$1.95 million.
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