673_10_Swaps__2_ - OTHER SWAPS NBA 673 February 23, 2006 1...

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1 OTHER SWAPS NBA 673 February 23, 2006
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2 Example: Plain Vanilla Foreign Currency Swap
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3 A Plain Vanilla Foreign Currency Swap Plain vanilla foreign currency swap has 3 steps: A gives M£50 to B and gets M$72.5 in return. For 7 years, A makes semiannual interest payments in dollars and B in pounds. Finally, A returns M$72.5 and B returns M£50. Value of swap to counterparty B is V (0) = B (0) - S (0) B £ (0) where B (0) is PV of dollar interest payments and principal payment at maturity received by party B, B £ (0) is PV in pounds of such payments made by B, and S (0) is dollar/sterling spot exchange rate at t=0.
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4 Example: Dollar - Euro Swap Party A gives M$10 to B, gets M €8.4. The current exchange rate is 0.8395 $/ €. Simple interest is paid semiannually in the currency of the received principal. All relevant data and calculations are provided in the table to the left. We add up the sum of discounted cash flows in each currency, then we convert to the currency in which we want to express the value. Do not forget that principal exchanges hands! Value to the party receiving dollars = $9965681.25 - $10020296.80 = -$54615.55. Is this calculation accurate? Did we miss anything?
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5 Variants of Foreign Currency Swaps Foreign currency swaps have numerous variations. Some examples are:
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This note was uploaded on 09/28/2008 for the course NBA 6730 taught by Professor Janosi,tibor during the Spring '06 term at Cornell University (Engineering School).

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673_10_Swaps__2_ - OTHER SWAPS NBA 673 February 23, 2006 1...

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