Page 312, Schweser Book 5: A bank entered into a 1-year currency swap with quarterly payments 200 days ago by agreeing to swap $1,000,000 for 800,000 euros. The bank agreed to pay an annual fixed rate of 5% on the 800,000 euros and receive a floating rate tied to LIBOR on the $1,000,000. 70-day LIBOR 4.0% rate 90-day LIBOR 4.4% rate 160-day LIBOR 4.8% rate 180-day LIBOR 5.2% rate 70-day Euribor 5.2% rate 90-day Euribor 5.6% rate 160-day Euribor 6.1% rate 180-day Euribor 6.3% rate The current spot exchange rate is .75 euros per dollar. The 90-day LIBOR at the last payment date was 4.2%. The value of the swap to the bank today is closest to: A. -$61,969 B. -$42.049 C. $42,049 Now my question is this: Obviously you take $1,000,000*(.042*90/360)+1,000,000 to get the floating rate payment on the payment date, but we want the value TODAY. Schweser says to discount the floating rate payment back using 70-day LIBOR (or it seems that way, since they us the .9923 present value factor). Where does 70 days come into it? Why multiply the "$1,000,000*(.042*90/360)+1,000,000 " by the PV factor of .9923?
Next PMT date is 270 days since inception. You are already 200 days into the swap deal. What’s the differential 70 days. So you have to dicsount it by 70 days LIBOR.
Thank you swaption!! You one smart chick. You single 
No she’s taken by me
I am hitting on IM_Awesome. Is there a quadrilateral arbitrage opportunity here?
nice
Can someone tell me why we’re not taking into account the 4th and final payment (1 year swap, paid quarterly) along with the return of currencies? 70 days from “now” there is a payment due (corresponding to 270th day, or Q3), why isn’t there one for Q4? Ug, I hate swaps.
No q4 for floating as niominal value is 1000000 at the end of q3. in 70 days that is. The answer is A?!
Mihaz Wrote: ------------------------------------------------------- > No q4 for floating as niominal value is 1000000 at > the end of q3. in 70 days that is. > The answer is A?! Huh? Can you explain?
floating resets to par, and you have 70 days to go. I think this is what Mihaz is trying to say.
That’s it Cp.
Oh crap, yes, thank you.
Is there anyone can tell me why “90-day LIBOR at the last payment date was 4.2%” stands for floating rate on 270 day instead of “360 day” . It said “the last payment date” I thought it would use “160-day factor” ? What I missed
Hi, I saw your briliant comments eveywhere. could you kindly tell me why “90-day LIBOR at the last payment date was 4.2%” stands for floating rate on 270 day instead of “360 day” . It said “the last payment date” I thought it would use “160-day factor” ? What I missed 13 quote edit reply new
Anyone want to work out the fixed leg and the currency translation to provide the final answer? I didnt get a number listed as a possible answer
please :)?
okay so nobody has answered it… il do it now…
$1M
4.2% / 4 = 1.05% or .0105 per dollar amount
plus 1 dollar. 1.0105 per dollar amount value is what you’ll have 70 days from now.
yes discount it back using 70day libor, because THAT IS YOUR ONLY CHOICE to get its value TODAY.
.9922 = 1 / ( 1 + .042 (70/360) ) < ---- basic notations for present discounting… know these
1.0105 * .9922 * 1M = 1,000,2701.21 = Value in $ we RECEIVE
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E800k ------ PAY-----> fixedeuribor 5% or 1.25% quarterly
70dayeuribor >> 5.2% >>> .9899 = 1 / ( 1 + .052 (70/360))
160dayeuribor >> 6.1% >>> .9736 = 1/ (1 + .061(160/360))
we recieve .0125 per euro amount on day 70 and day 160.on day 160 we can back every dollar of principal (in terms of valuation/calculation)… with 800k principal just multiply it.
now to value these cashflowback to present
so, 800k * .0125 * (.9899) + 800k * 1.0125 * (.9736) = 798,515 = Value in E we PAY
OR OR OR because of current exchange rates… 798,515 euros / .75 euros per dollar = 1,064,686 dollars
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SO VALUE OF RECEIVE - PAY = 1,002,701 - 1,064,686 dollars = answer is A…
let me know if you got Q’s
^Awesome - many thanks. I also calculated the float as 1,002,719.15 and the fixed at 798,515. At this step, instead of changing the fixed into $$ i converted into euro and got 46,476. foolish but i do appreciate your response.
np, actually made the same mistake… good it only to me 10seconds to realize that mistake cuz that would be costly in the exam
Please, can u help me?