A U.S. corporation is considering entering into a currency swap that will call for the firm to pay dollars and receive British pounds. The dollar notional principal will be $35 million. The swap will call for semiannual payments using the adjustment 180/360. The exchange rate is $1.60. The term structures of dollar LIBOR and pound LIBOR are as follows:
|
Days
|
Dollar LIBOR
|
Pound LIBOR
|
|
180
|
7.00%
|
6.50%
|
|
360
|
7.25
|
7.10
|
|
540
|
7.45
|
7.50
|
|
720
|
7.55
|
8.00
|
Answer the following questions.
a. Determine the appropriate pound notional principal. Use this result in each of the remaining questions.
b. Determine the fixed rates in dollars and in pounds.
c. For each of the following cases, determine the first payment on the swap:
i. Dollars fixed, pounds fixed
ii. Dollars fixed, pounds floating
iii. Dollars floating, pounds floating
iv. Dollars floating, pounds fixed
d. Now assume it is 120 days into the life of the swap. The new exchange rate is $1.42. The new term structures are as follows:
|
Days
|
Dollar LIBOR
|
Pound LIBOR
|
|
60
|
6.80%
|
6.40%
|
|
240
|
7.05
|
6.90
|
|
420
|
7.15
|
7.30
|
|
600
|
7.20
|
7.45
|
Determine the value of the swap for each of the following cases:
i. Dollars fixed, pounds fixed
ii. Dollars fixed, pounds floating
iii. Dollars floating, pounds floating
iv. Dollars floating, pounds fixed.