Periodicity Currency Swap


Doing the afteroon 2013 mock and got to the first Derivatives question, #7. Basically a very short question, why do they go a head and assume that the fixed payments are made semi-annually for fixed-fixed currency swaps? I can’t even find an explanation in the book, where they make the same example of semi-annually fixed rate payments.

If one leg had been floating I guess the market standard is 3-months floating for most markets…

And while we are at it, question #10, what are they doing?

They use the wrong strike price 30 instead of 32 MEUR and then they use down movement in pi = 1+r-d/(u-d) formula d=0.83333 (but stated it’s a 20% down movement). Double errata?

Hello, hello

question 10 errata. check the CFA page!

By the way… could anyone please explain to me questions 7 and 8…?

I don’t even get the discount factors… totally frustated on derivatives! Thanks

Thanks mate, lost all confidence after question 10, now it feels better :slight_smile:

Q7: You just concentrate on one currency at the time at discount all cashflows back to present value. At the end convert EUR to PNL with the current exchange rate. You make it harder than it is…

Why do you assume is semiannual payments?

FIB yeah that’s the question, no answer so far :confused:

I have the same exact question. I thought I knew derivitives well, but this question really made me question that. If anyone could explain why we are assuming semi-annual payment that would be great!!


I’m glad I’m not the only one who wondered why the hell they dive into using semi annual. I really hope someone can shed some light on it.

I definitely learned a valuable lesson in the pm session, don’t let 1 horrific item set put you off, and if 1 question takes you over 5 minutes, move on and come back if you have time.

I guess we have to email CFA to get an answer to this one…

Unfortunately they don’t respond to questions on the material from candidates, if it turns out to be wrong they add it to the errata and publish it to everyone, if it is right, they do nothing.

I’m going through the CFAI reading on swaps today and I’m hoping to find an answer.

Should we just assume semi annual on exam day if it doesn’t state the payment period in the question or vignette?

as usual error by CFA cool

yes… Errata for the Errata needed! - in the errata binomial tree (q. 10) the c+ node value is still the erroneous - 5,59…

also puzzled by the periodicity in this case…

clutching at straws here but is it because the vignette states that the economists forecast that PLN interest rates could rise in the 4th quarter, which is 6 months from the present?

Is that really enough for us to go on to assume that the swaps would be semi annual?

You’re a businessman in India. You want to open a subsidiary in USA. You apply for a loan in the US market for $1,000,000 but the bank wants a higher interest rate from you for the loan. Luckily you find a person in USA who also wants money in Indian rupees. He can borrow at a cheaper rate from there and you can borrow at a cheaper rate from India. You realize that this swap will be profitable to you and this swap ain’t that bad as it is in derivatives level II course. You guys enter into a swap position which is floating INR - fixed USD. The interest rate in India are : 180 days interest rate = 6.0% 360 days interest rate = 6.5% 540 days interest rate = 7.0% 720 interest rate = 6.9% The corresponding interest rates in USA are: 180 days interest rate = 3.5% 360 days interest rate = 3.7% 540 days interest rate = 4.2% 720 days interest rate = 4.5% You exchange the currencies at an exchange rate of 53 INR/USD. Total amount exchanged is $600,000. You still want $400,000 more money. You find another person who is ready to enter into fixed INR - floating USD swap. You enter into the position at the same exchange rate i.e. 53 INR/USD. Your swap period for both the swap positions are 2 years and the interest payment on the swap is semi-annually. You find out that after 450 days the interest rates have changed. The interest rates in India are: 90 days interest rate = 7.2% 180 days interest rate = 7.4% 270 days interest rate = 7.5% The interest rate at the last settlement date for the next period for INR was 7.0%. The corresponding interest rates in USA are: 90 days interest rate = 4.5% 180 days interest rate = 4.8% 270 days interest rate = 5.2% The interest rate at the last settlement date for the next period for USD was 4.2%. The exchange rate at the end of 450 days was 53.7 INR/USD. Question (1) What are the total payments made by you at the end of the period? Question (2) What is the value of the swaps for you at the end of 450 days? Question (3) What is your total credit risk from the swap position at the end of 450 days