Question #58

Reading: Reading 30 Pricing and Valuation of Forward Commitments

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

Page: 24

Status: Unattempted

Part of Context Group: Q57-58
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
How many of Smith's comments are correct?
Answer Choices:
A. Neither comment is correct
B. One comment is correct
C. Both comments are correct
Explanation
Typesetting math: 100% When the index declines, the fixed rate payer would pay the negative return in addition to the fixed rate and, hence, will suffer a loss greater than the fixed rate. There is no way of knowing the first payment on an equity swap because we do not know the value of the equity index on the payment date. The floating rate for the first settlement also known at time 0 (known as advance set, paid in arrears).
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