Question #58
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 27
Status: Unattempted
Part of Context Group: Q58-60
First in Group
Shared Context
Question
Using the information in Exhibits 1 and 2, which of the following is closest to the amount of the British pound paid on the first settlement date?
Answer Choices:
A. £165,000
B. £187,234
C. £264,000
Explanation
=
= 0.0316
1−PV factor for last cash flow
∑
i=1 to n
PV factor for ith cash flow
1−0.8826
0.9716+0.9430+0.9180+0.8826
0.0316 ×
= 0.0632
360
180
The semi-annual fixed payment per pound of notional principal is calculated as:
Given the dollar notional principal of $10 million, the notional principal in British pounds
(using the exchange rate on the date the swap is initiated) will be:
Hence the payment made every 6 months will be £6.25m × 0.0264 = £165,000.