Hello guys , i am seriously begging your help.
I handled a quesiton from candidate source and…
answer got me a bit confused, I thought, when calculate the value of the either of currcency swap or IRS, we should have fixed rate pmt first, and discount with the table given on certain date.
Since the question gave me two fixed rates that i thought they replace the fixed-rate calculation, i used them as fixed rates.
However, the answer did not use but calculate the fixed rate as we should do most of normal IRS or currency swaps.
My question is" can we ignore the given fixed rates?"
Question
next, Whitney meets with Grand Manufacturing. This client is based in Hong Kong but requires a €25,000,000 one-year bridge loan to fund operations in Germany. Grand Manufacturing is currently able to borrow euros at an interest rate of 3.75% but wonders if there is a less expensive alternative. Whitney advises Grand to borrow in Hong Kong dollars and enter into a one-year foreign currency swap with quarterly payments to pay euros at a fixed rate of 2.32% and receive Hong Kong dollars at a fixed rate of 1.84%. The current exchange rate is HK$11.42/ €1.
Answer
Incorrect.
Grand receives €25,000,000 and pays HK$285,500,000 based on the current exchange rate of HK$11.42/€1. Grand will pay an interest rate of 2.32% on the euro and receive 1.84% on the Hong Kong dollar.
Forty five days into the swap:
Per HK$1 of notional principal, the present value of the fixed payments received on the Hong dollar = 0.0046 × (0.9976 + 0.9909 + 0.9834 + 0.9674) + (1 × 0.9674) = 0.9855.
Per €1 of notional principal, the present value of the fixed payments paid on the euro
= 0.0058 × (0.9963 + 0.9888 + 0.9811 + 0.9650) + (1 × 0.9650) = 0.9878.
Note that based on the exchange rate of HK$11.42/€1, the actual notional principal = 1/11.42 = €0.08757.
Present value of euro fixed payments = 0.9878 × 0.08757 = 0.08649.
Present value of euro fixed payments in HK$ = 0.08649 × 9.96 = 0.8615.
Market value of the swap = HK$285,500,000 × (0.9855 – 0.8615) = HK$35,402,000.