Explanation:
Step 1: Work out the PV of both the USD and CAD payments.
USD = $390,000 / 1.03 + 390,000 / 1.03^2 + 15,390,000 / 1.03^3378`,641 + 367,612 + 14,084,030 = 14,830,283$
CAD = $740,000 / 1.045 + 740,000 / 1.045^2 + 20,740,000 / 1.045^3708`,134 + 677,640 + 18,174,392 = 19,560,166$
Step 2: Convert CAD to USD, then compare the payments.
CAD $19,560,166 / 1.62 = `
Value of the swap in USD = \`14,830,283 - \
Value of the swap in USD = \`2`,756,106$
(Book 3, Module 46.3, LO 46.j)
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Question 83
Consider a three-year currency swap involving exchanging annual interest of 2.6% on $15 million for 3.70% on 20 million Canadian dollars (CAD). The CAD per USD spot rate is 1.62. The term structure is flat in both countries. What is the value of the swap in USD if interest rates in Canada are 4.5% and are 3.0% in the United States? Assume discrete compounding and round to the nearest dollar.
A
$2.8 million.
B
$2.2 million.
C
$2.0 million.
D
$1.8 million.
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