FRM Part I · FRM Exam Part I · Swaps
A firm has one year left on a currency swap in which it receives yen fixed at 1% on a principal of 1,000 million yen and pays dollars fixed at 4% on a principal of 10 million dollars, with a single payment of interest plus principal at year end. The spot rate is 100 yen per dollar. Flat annual-compounded discount rates are 2% for yen and 3% for dollars. What is the swap value to the firm, in dollars, using the bond-difference approach?
The swap is worth about -0.195 million dollars to the firm. The yen bond is worth 1,010/1.02 = 990.2 million yen, or 9.902 million dollars, while the dollar bond is worth 10.4/1.03 = 10.097 million. The firm receives the lower-valued bond, so the value is negative.
- A-0.195 millionCorrect
- B+0.195 million
- C-0.291 million
- D-0.098 million
Explanation
Yen bond = 1,010 / 1.02 = 990.196 million yen, which is 9.902 million dollars at 100 yen per dollar. Dollar bond = 10.4 / 1.03 = 10.097 million. Swap value = 9.902 - 10.097 = -0.195 million. Discounting the yen flows at the dollar rate gives -0.291 million, which uses the wrong curve. Reversing the sign confuses the receive and pay legs.
Did you get it right without looking?
One question tells you little. A timed set on Swaps shows your real accuracy, how long you take and where you lose marks.
More Swaps questions
- A company enters a 3-year plain vanilla interest rate swap with annual payments, paying a fixed rate of 4.0% and receiving 12-month SOFR-bas…
- Why does a fixed-for-fixed currency swap generally expose a counterparty to more credit risk than an otherwise comparable single-currency in…
- A bank has a USD 100 million pay-fixed swap with a client and an offsetting USD 100 million receive-fixed swap with another dealer, both wit…
- Which feature most clearly distinguishes a standard fixed-for-fixed currency swap from a plain vanilla single-currency interest rate swap?
- A $100 million swap pays floating semiannually. The next floating payment is due in two months and was fixed at a 4% annual rate at the last…
- A currency swap has one year remaining with a single final payment. The party receives GBP 4% on GBP 10 million and pays USD 4% on USD 13 mi…