The answer given to this problem made no sense to me. Any help? 90 days ago the exchange rate for the Canadian dollar (C$) was 0.83 and the term structure was: LIBOR 5.6% - 180 days 6% - 360 days CDN 4.8% -180 days 5.4%. - 360 days A swap was initiated with payments of 5.3% fixed in C and floating rate payments in USD on a notional principal of USD 1 million with semiannual payments. 90 days have passed, the exchange rate for C$ is $0.84 and the yield curve is: LIBOR 5.2% - 90 days 5.6% - 270 days CDN 4.8% 5.4% What is the value of the swap to the floating-rate payer? A) -$2,708. B) $10,125. C) $3,472.
I hate swaps and derivatives in general. I need to review this crap.
ans 10125. swap is a receive fixed, pay floating. Pay floating: 1.028 which was the factor as of 180 days * 1/(1+0.052*90/360) = 1.014807502 bcos he receives fixed in C 90: 1/(1+0.048*90/360) *.0265 = 0.026185771 270: 1/(1+0.054*270/360) * 1.0265 = 0.98654493 Total: 1.012730701 convert to C at beginning = /.83 convert back to USD = *.84 = 1.024942276 Difference = 1.024942276 - 1.01487502 = 0.010057256 on 1M -> 10057.25 Rounding…
Thanks, this is pretty difficult. I think I am going to read through these chapters again
(1.02493227-1.01480750)*1m = 10124.77 = B
and B was correct.
It’s not too bad guys. I know CPK and swaptiongamma make it look easy, but that’s because they’re good. Draw out a timeline if you need to 0--------------------180---------------360 This is what the payment structure looks like at the beginning of the contract. Here because we’re doing a currency swap, we have to make sure to note that notional principal is exchanged at the beginning of the contract, and the time 0 exchange rate is used to calculate equivalent notional amounts in each currency We fast forward 90 days ahead and our payment looks like this 90 -----------180------------------360 the time between today and the 180day payment is 90 days, and the time between today is 270 days We know what the fixed rate is on the Canadian payer. It’s 0.053 or 0.0265 90 days and 270 days from now. Also on the 270th day, we pay back the principal with that 0.0265 coupon. We discount both of those payments by TODAY’s cdn rates Similarly for the floating rate payer (US) will pay at 180 days the floating rate (THAT WAS SET BY LIBOR AT TIME 0) and the future value of the floating rate payer will be the face value, since the note gets reset to the LIBOR value at that time. The 0.028 is the coupon payment determined from the 180day libor at time 0 and the 1 is the value of the swap at 180 days. Discount that back to today using the CURRENT libor