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:

Workers

Individuals engaged in an occupation or activity, especially those who are part of the labor force.

Reference Group

A social group that individuals use as a standard for evaluating themselves, their attitudes, and their behaviors.

Norms

Established standards of behavior or beliefs that are considered acceptable within a society or group.

Social Success

The achievement of desirable outcomes in social settings, such as forming meaningful relationships and gaining social acceptance.