FRM Part I · FRM Exam Part I · Swaps
A company has a two-year currency swap with annual payments. It receives EUR 3% on EUR 10 million and pays USD 4% on USD 11 million. The spot rate is USD 1.10 per EUR. Flat annual-compounded discount rates are 2% in EUR and 4% in USD. What is the swap's value to the company in USD?
The swap is worth about positive USD 0.21 million to the company. The EUR bond received is worth EUR 10.194 million, or USD 11.214 million at spot. The USD bond paid is at par, worth USD 11 million. The difference is a gain of roughly USD 0.21 million.
- A+USD 0.21 millionCorrect
- B-USD 0.21 million
- C+USD 0.19 million
- D+USD 1.21 million
Explanation
The USD bond is at par, so it is worth USD 11.00m. The EUR bond is 0.3/1.02 + 10.3/1.0404 = 0.2941 + 9.9000 = EUR 10.1942m, or USD 11.2136m at spot. The swap value is 11.2136 - 11.000 = +USD 0.2136m. The 0.19 option leaves the EUR gain of 0.194m unconverted. The -0.21 option reverses the sign.
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