I have some basic swap question. In this example, 1. how do you know whether is pay fixed or pay floating 2. Why did he use Euribor 3. Any Swap gurus, Can any one walk through this example Consider a one-year currency swap with semiannual payments. The payments are in U.S. dollars and euros. The current exchange rate of the euro is $1.30 and interest rates are 180 days 360 days USD LIBOR 5.6% 6.0% Euribor 4.8% 5.4% What is the fixed rate in euros? A) 5.318%. B) 2.659%. C) 5.245%. Your answer: A was correct! The present values of 1 euro received in 180 days and 1 euro received in 360 days are: 1/(1 + 0.048 × (180/360)) = 0.9766 and 1/1.054 = 0.9488 The fixed rate in euros is (1 - 0.9488) / (0.9766 + 0.9488) = 0.026592 × (360/180) = 5.318%. The notional principal is 100,000/1.30 = 76,923 euros.
A currency swap is basically the same as a regular sway and you will price the fixed and floating rates the same as you would regularly. The only addition is that you are doing two fix rates and two floating rates each time. You then just need to convert currency in order to relate them to each other and find the benefit…
- You are valuing the fixed rate side, which is the rate the fixed rate payer would pay on the contract. 2. Why would you do otherwise?
My bad. I did not read the question, Fixed in Euros. Got it. Thanks