Problem:
A U.S. Company has a foreign subsidiary in London. Concerned about translation risk for the upcoming fiscal year (beginning in 60 days), the treasurer of the U.S. company is contemplating entering into a currency swaption expiring in 60 days with an exercise rate of 5.24%(pounds)/3.84%(dollars). The underlying swap is a conventional fixed-for-floating with a term of one year (corresponding to the fiscal year) and settlements on a 90/360-day basis. The notional principal is 18million pounds, the average budgeted subsidiary quarterly revenues for the upcoming fiscal year. Given the following information:
Current exchange rate: US$1.8395 U.K. 0.5436 pounds
Term structure:
60-day US 2.95% u.K. 3.78%
150-day US 3% U.K. 3.81%
240-day us 3.20% u.k. 4.89%
330-day us 3.45% u.k. 5.01%
420-day US 3.87% U.K. 5.32%
How do I go about calculating the price and structuring the terms of the underlying swap?
From the treasurer's perspective, how do I go about calculating the price of the swaption?