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:

Microvilli

Tiny hairlike projections on the surface of some cells that increase the surface area for absorption or secretion.

Flagella

Flagella are long, whip-like structures that propel cells and microorganisms through their environment.

Microtubules

Cylindrical structures within cells that provide shape and support, play roles in intracellular transport, and are involved in cell division.

Microfilaments

Fine, thread-like protein fibers, part of the cytoskeleton of a cell, involved in movement and support.