Question #8
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 4
Status: Unattempted
Question
Consider a one-year currency swap with semiannual payments. The payments are in U.S. dollars and euros. The current exchange rate of the euro is $1.30 and interest rates are 180 days 360 days USD MRR 5.6% 6.0% MRR 4.8% 5.4% What is the fixed rate in euros?
Answer Choices:
A. 5.318%
B. 2.659%
C. 5.245%
Explanation
Typesetting math: 100%
The present values of 1 euro received in 180 days and 1 euro received in 360 days are:
1/(1 + 0.048 × (180/360)) = 0.9766 and 1/1.054 = 0.9488
The fixed rate in euros is (1 - 0.9488) / (0.9766 + 0.9488) = 0.026592 × (360/180) = 5.318%.
The notional principal is 100,000/1.30 = 76,923 euros.