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:

Offeree's Silence

Generally not considered an acceptance of an offer in contract law, unless certain conditions or previous dealings imply agreement.

Acceptance

In contract law, the unconditional agreement to the terms of an offer, which once given, creates a binding contract.

Mirror Image Rule

A principle in contract law stating that an offer must be accepted exactly without modifications; any changes to the terms effectively make the acceptance a counteroffer.

Rejection

The act of refusing or dismissing a proposal, idea, or application.