An Interest-Only Currency Swap Has a Remaining Life of 18

question 63

Essay

An interest-only currency swap has a remaining life of 18 months. It involves exchanging interest at 14% on £20 million for interest at 10% on $14 million once a year. The term structure of interest rates is currently flat in both the U.S. and in the U.K. If the swap were negotiated today the interest rates exchanged would be $8% and £11%. All rates were quoted with annual compounding. The current exchange rate is $1.95 = £1. What is the value of the swap to the party paying dollars?

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Definitions:

Alleles

Different versions of a gene, which can result in variations in the inherited characteristic that the gene controls.

Autosomal Dominant

A pattern of inheritance where a trait is expressed in individuals who have inherited only one copy of a gene mutation from one parent.

Autosomal Recessive

A pattern of inheritance where two copies of a mutated gene, one inherited from each parent, are necessary to express a recessive trait or disorder.

Probability

The measure of the likelihood that an event will occur, quantified as a number between 0 and 1.