Question #73 - Reading 30 Pricing and Valuation of Forward Commitments

Reading: Reading 30 Pricing and Valuation of Forward Commitments

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

Page: 30

Status: Unattempted

Shared Context

- Using the price and predicted MRR rates in Exhibit 1, which of the following is closest to the predicted value of the FRA at the year end? A) –$100,000 B) –-$85,000 C) –$62,000

Question

Using the details shown in Exhibit 2, under the terms of the currency swap at the first settlement date Sam Smith would most likely:

Answer Choices:

A. pay EUR 150,000

B. pay USD 130,000

C. pay EUR 126,050

Explanation

Sam Smith is using the currency swap to obtain EUR funding. It will therefore receive EUR (and pay USD) at the outset of the swap and pay EUR interest (and receive USD) at each settlement date. The USD notional principal is 40,000,000. At a spot rate of 1.19 that equates to EUR 33,613,445 The interest payment is therefore 33,613,445 × 1.5% × 90/360 = 126,050

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