Hi there,
I am working EOC of Reading 51 Swap Market and contracts. I refer to Q3, Q4 and Q5 in particular. I am still lost how to determine which you are going to pay and which you are going to receive. Can someone please elucidate?
Thank you.
I don’t have a copy of the curriculum, but if you can provide some details (without infringing on CFA Institute’s copyright), I’ll be happy to help.
The questions deal with currency swaps. Lets say the two currencies are GBP and EURO. The UK term structure and Euribor term structure are given to you. In addition, as we move foward say X days, the new Uk term structure and Euribor term structure is given.
Then it tells you to calculate the Market Values in pounds of the following swaps.
to pay UK fixed and received EUR fixed.
to pay UK fixed and received EUR floating.
to pay UK floating and received EUR fixed.
to pay UK floating and received EUR floating.
I still cannot figure out which one has to be subtracted from the other.
Thank you.
The value to an investor is always the value received less the value paid. This is true for _ anything _ (swaps, forwards, options, stocks, bonds, inventory, whatever).
In each of these you’re receiving euros and paying pounds, so you compute the PV(euros received) (converted to pounds) less the PV(pounds paid).
Voilà!
You’re welcome.
Got it! thanks my friend.
Wish you a nice evening.
Good to hear!
My pleasure.
I appreciate it.