Question #57

Reading: Reading 30 Pricing and Valuation of Forward Commitments

PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf

Page: 24

Status: Unattempted

Correct Answer: A

Part of Context Group: Q57-58 First in Group
Shared Context
- If OTS decides on a fixed for fixed currency swap, what is the market value of the swap to OTS three months after swap initiation? A) The value of the euro payments is €97.68m and converting the euro value to USD using €1: USD1.55, the swap has a positive to OTS. B) The value of the euro payments is €100.27m and converting the euro value to USD using €1: USD1.48, the swap has a positive to OTS. C) The value of the euro payments is €101.8m and converting the euro value to USD using €1: USD1.43, the swap has a positive to OTS.
Question
Using the information in Exhibit 2, what is the market value of the equity swap to OTS three months after swap initiation?
Answer Choices:
A. +USD80.35 million
B. +USD85.33 million
C. +USD88.76 million
Explanation
OTS is paying the equity return and the value is: (1000 / 1190) × USD500m = USD420.17 million The value of fixed payments is equivalent to the value of a one-year fixed coupon bond with 0.5% semi-annual coupon. The value of bond is the present value of the two coupon payments and the par value: [(0.005 × 0.9979) + (1.005 × 0.9911)] × 500m = USD 500.52 million. Value to OTS: USD500.52m – USD420.17m = USD80.35 million
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