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

question 5

Essay

An interest-only currency swap has a remaining life of 18 months.It involves exchanging interest at 14 percent on £20 million for interest at 10 percent 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 percent and £11 percent.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:

Commitment

The state or quality of being dedicated to a cause, activity, or goal.

Persistent In Beliefs

The quality of firmly adhering to one's own opinions or convictions, even in the face of opposition or evidence to the contrary.

Norm Of Reciprocity

A social standard that expects individuals to respond to each other's actions with similar actions, promoting cooperation and fairness.

Favors Of The Same Size

Acts of kindness or assistance that are comparable in magnitude or extent.