Can anyone explain to me how the answer to this question was calculated (or why it is calculated this way)? I cannot seem to see the logic behind it.

90 days ago the exchange rate for the Canadian dollar (C$) was $0.83 and the term structure was:

*180 days*

*360 days*

LIBOR

5.6%

6%

CDN

4.8%

5.4%.

A swap was initiated with payments of 5.3% fixed in C$ and floating rate payments in USD on a notional principal of USD 1 million with semiannual payments.

90 days have passed, the exchange rate for C$ is $0.84 and the yield curve is:

*90 days*

*270 days*

LIBOR

5.2%

5.6%

CDN

4.8%

5.4%

What is the value of the swap to the floating-rate payer?

**A)** $10,126. **B)** −$2,708. **C)** $3,472.

**Your answer: C was incorrect. The correct answer was A)** $10,126.

The present value of the USD floating-rate payment is:

(1.028 / 1.013) = 1.014808 1.014808 × 1,000,000 = $1,014,808

The present value of the fixed C$ payments per 1 CDN is:

(0.0265 / 1.012) + (1.0265 / 1.0405) = 1.012731 and for the whole swap amount, in USD is 1.012731 × 0.84 × (1,000,000 / 0.83) = $1,024,932

−1,014,808 + 1,024,932 = $10,126