# 14 79 chapter 14 interest rate and currency swaps 84

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Chapter 3 / Exercise 46
Mathematical Applications for the Management, Life, and Social Sciences
Harshbarger
Expert Verified
14-79
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Chapter 3 / Exercise 46
Mathematical Applications for the Management, Life, and Social Sciences
Harshbarger
Expert Verified
Chapter 14 Interest Rate and Currency Swaps84. Consider fixed-for-fixed currency swap. Firm A is a U.S.-based multinational. Firm B is a U.K.-based multinational. Firm A wants to finance a 2 million expansion in Great Britain. Firm B wants to finance a \$4 million expansion in the U.S. The spot exchange rate is 1.00 = \$2.00. Firm A can borrow dollars at \$10% and pounds sterling at 12%. Firm B can borrow dollars at 9% and pounds sterling at 11%. Which of the following swaps is mutually beneficial to each party and meets their financing needs? Neither party should face exchange rate risk. A.There is no mutually beneficial swap that has neither party facing exchange rate risk.B. Firm A should borrow \$4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 8% in dollars to A.C. Firm A should borrow \$2 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 4 million pounds and pays 8% in dollars to A.D. Firm A should borrow \$4 million in dollars, pay 11% in pounds to Firm B, who in turn borrows 2 million pounds and pays 10% in dollars to A.Since the QSD = 0 there is no mutually beneficial swap.85. Consider bank that has entered into a five-year swap on a notational balance of \$10,000,000 with a corporate customer who has agreed to pay a fixed payment of 10 percent in exchange for LIBOR. As of the fourth reset date, determine the price of the swap from the bank's point of view assuming that the fixed-rate side of the swap has increased to 11 percent. LIBOR is at 5 percent. A. \$909,090.91 gain.B.\$90,090.09 lossC. No loss or no gain since maturity has not arrived.D. \$90,090.09 gainAs of the fourth reset date, there is one year to go on the swap. The bank is owed a fixed payment of \$11,000,000 = \$10,000,000 + 0.10 ×\$10,000,000. The relevant discount rate is 11 percent and the present value is \$9,909,090.91. On any reset date, the present value of the future floating-rate payments the bank will receive from the customer based on the notational value will always be \$10,000,000. Thus the net position of the bank is \$9,909,090.91 - \$10,000,000 = -\$90,090.09.14-80
Chapter 14 Interest Rate and Currency Swaps86. Find the all-in-cost of a swap to a party that has agreed to borrow \$5 million at 5 percent externally and pays LIBOR + ½ percent on a notational principal of \$5 million in exchange for fixed rate payments of 6 percent. A. LIBOR + ½ percentB. LIBORC.LIBOR - ½ percentD. None of the aboveadd up the money coming in and subtract the money coming out. Be consistent. [LIBOR + ½% ] + 5% - 6% = LIBOR - ½%14-81
Chapter 14 Interest Rate and Currency Swaps