damn, ozzy has this stuff nailed. thanks for the help.
This was extremely helpful. Thanks guys.
Ok GAME ON- (thank you BLOU23 in advance for giving up your lunch break today to sit with me and explain currency swaps!) Consider a fixed-for-fixed 1-year $100,000 semiannual currency swap with rates of 5.2 percent in USD and 4.8 percent in CHF, originated when the exchange rate is $0.34. 90 days later, the exchange rate is $0.35 and the term structure is: 90 days 270 days LIBOR 5.2% 5.6% Swiss 4.8% 5.4% What is the value of the swap to the USD payer? A) -$2,719. B) $2,814. C) -$2,814. D) $2,719
D
D
yes and yes! i actually do them out a bit differently than they did it below, but there’s really no wrong way to eat a reeces. Your answer: D was correct! The present value of the fixed payments on one CHF is 0.024/1.012 + 1.024/1.0405 = 1.00786. At the current exchange rate the value is 1.00786 × 0.35 = USD 0.35275. The notional amount is 100,000/.34 = 294,118 CHF so the dollar value of the CHF payments is 0.35275 × 294,118 = $103,750. The present value of the USD payments is (0.026/1.013 + 1.026/1.042) × 100,000 = $101,031. The value of the swap to the dollar payer is 103,750 – 101,031 = $2,719.
I love you guys.
OMG OMG OMG I understand swaps, took me only 3 days but I think I have a 75% understanding of this former elusive subject. Thank you all, you are all great online tutors 
ozzy609 Wrote: ------------------------------------------------------- > Here’s how I did that one: > > Floating > 5,000,000*.037/2=92,500 > 92,500/1+(.034*(90/360)) = 91720.37 > 5,000,000/1+(.034*(90/360))=4,957,858 > > 4,957,858+91,720 = 5,049,578 > > Fixed (767/760) * 5,000,000 = 5,046,052.63 > > 5.049MM - 5.046MM = 3,526 Sorry I’m a little slow to ask this, but I must be missing something. Why are we assuming that the swap is for only 6 months? Isn’t there a second floating payment of 92,500 occuring at the end of the year (so payment in month 6: 92,500, payment in month 12: 5,092,500)? That is the methodology we used in the following question that Ozzy posted. Can anyone please clarify?
This is just like any other swap. 1. Identify the streams based on inception rates 2. Figure out which currency appreciated 3. Adjust the foreign currency stream at the new rate 4. Discount the streams to present 5. Take the difference of the present value streams depending on perspective Great job everyone
Zombie71 Wrote: ------------------------------------------------------- > ozzy609 Wrote: > -------------------------------------------------- > ----- > > Here’s how I did that one: > > > > Floating > > 5,000,000*.037/2=92,500 > > 92,500/1+(.034*(90/360)) = 91720.37 > > 5,000,000/1+(.034*(90/360))=4,957,858 > > > > 4,957,858+91,720 = 5,049,578 > > > > Fixed (767/760) * 5,000,000 = 5,046,052.63 > > > > 5.049MM - 5.046MM = 3,526 > > > Sorry I’m a little slow to ask this, but I must be > missing something. > > Why are we assuming that the swap is for only 6 > months? Isn’t there a second floating payment of > 92,500 occuring at the end of the year (so payment > in month 6: 92,500, payment in month 12: > 5,092,500)? That is the methodology we used in the > following question that Ozzy posted. > > Can anyone please clarify? In a floating stream, you only consider the first payment. That is the only thing that is known since it is based on the rate at inception. The rest is valued using a discount rate equal to 1/r adjusted for the time to the next payment, multiplied by the notional. Then you add the two together. The reason for this is that the rate resets at each payment date.
key point on swaps Float = look at only the floating rates of the PAST Fixed = PV of ALL the fixed rates of the future you bring them to the date you want to analyze and take the difference. This works because as Danteshek stated, the rate resets at each payment date.
Aaahhh, I’m an idot. Because it’s an equity swap, I just assumed the non-equity side of the agreement is fixed, which clearly is incorrect. Thanks!
same here, only two days to figure this subject. had to go at a slow pace to get this. Hopefully now i could get 5 out 6 on the item set.