Swaps_Currency_97

Swaps_Currency_97 - Swaps Currency Swaps Jonathan Kinlay...

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Copyright © 1997-2006 Investment Analytics Swaps Currency Swaps Jonathan Kinlay
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Copyright © 1997-2006 Investment Analytics Agenda ¾ Currency swap valuation ¾ Exposure analysis ¾ Convexity of a currency swap
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Copyright © 1997-2006 Investment Analytics Demand for Currency Swaps ¾ Money market investors exploit high-yield currencies without forex exposure ¾ Asset managers enhance portfolio returns ¾ Liability managers reduce effective borrowing costs ¾ Central bank intervention
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Copyright © 1997-2006 Investment Analytics Structures ¾ Fixed for fixed ¾ LIBOR currency A for LIBOR currency B ¾ Variants Differential Quanto Third currency
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Copyright © 1997-2006 Investment Analytics Valuation ¾ Based on: Cash flows: spot LIBOR curve Discounting: spot LIBOR curve ¾ Spot curves have different liquidity and risk premiums
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Copyright © 1997-2006 Investment Analytics Currency vs. Interest Rate Swaps ¾ Notional principal Swapped at effective date at spot exchange rate S Reswapped at maturity at initial spot rate S ¾ Reset dates Interest payments swapped in relation to notional
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Copyright © 1997-2006 Investment Analytics Exposure from Currency Swaps ¾ First, understand how currency swap works and is valued Work through actual swap transaction to develop insight ¾ Second, apply valuation insights for sensitivity analysis Change in spot rates? Hedging currency swaps?
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Copyright © 1997-2006 Investment Analytics ± Fixed for Floating Currency Swap ± Contract: Buyer’s Perspective – Effective Date: Swaps USD for JPY at S 0 = JPY/USD – Pays Fixed Interest for JPY (Semiannually) – Receives USD LIBOR (Semiannually) – Maturity Date: Swaps JPY for USD at 1/S 0 JPY/USD Currency Swap
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Copyright © 1997-2006 Investment Analytics JPY/USD Quotes ± Fixed-for-Floating (6-Month Resets) ± JPY/USD ± 1 2 5 10 ± 1.02/06 1.54/59 1.84/88 3.48/51 ± Desk: Pays 1.54 Receives USD LIBOR ± Desk: Receives 1.59 Pays USD LIBOR
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Copyright © 1997-2006 Investment Analytics JPY/USD Basis Quotes ± Floating-for-Floating (6-Month Resets) ± USD/JPY ± 1 2 5 10 ± -9/-8 -10/-9 -12/-11 -12/-12 ± e.g., 2-yr Desk: Pays JPY LIBOR -10 Receives USD LIBOR ± Desk: Receives -9 Pays USD LIBOR
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Copyright © 1997-2006 Investment Analytics Currency Swap Valuation LIBOR SPOT SWAP LEG A CURRENCY I RATES:LIBOR/ FRA/FUTURES UNBIASED EXPECTATIONS RATES FORWARD EAY LIBOR DISCOUNTING FORWARD INTEREST LIBOR SPOT CURRENCY II UNBIASED EXPECTATIONS SWAP LEG B CURRENCY I PRICE EQUATES PV LEG A/B CURRENCY I RATES:LIBOR/ FRA/FUTURES FORWARD FX II to I UNBIASED EXPECTATIONS
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Copyright © 1997-2006 Investment Analytics USD/JPY Basis Swap Notional principal amount USD10,000,000 Yen977,500,000 Effective date August 16, 1995 Day count between each reset date: February 16, 1996 184 days August 16, 1996 182 days Maturity date August 16, 1996 Interest settlements are in arrears. Floating Side I (Leg):
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This document was uploaded on 11/04/2011 for the course ECON 421 at CUNY York.

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Swaps_Currency_97 - Swaps Currency Swaps Jonathan Kinlay...

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