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CFA Level I · CFA Level I Exam · Pricing and Valuation of Interest Rate and Other Swaps

A swap has two years remaining with annual payments. The party receives GBP 5 million notional at 3% and pays USD 6.5 million notional at 4.5%. Spot is USD 1.30 per GBP. Discount factors are GBP 0.9804 (year 1) and 0.9612 (year 2); USD 0.9709 (year 1) and 0.9426 (year 2). The value to this party is closest to:

The swap is worth about minus USD 0.06 million to the party receiving GBP. The GBP leg converts to USD 6.626 million and the USD leg to USD 6.687 million, so the party owes slightly more than it receives. The two legs must be compared in the same currency.

  1. A–USD 1.59 million
  2. B–USD 0.06 millionCorrect
  3. CUSD 0.06 million

Explanation

The GBP leg is 0.15 × 0.9804 + 5.15 × 0.9612 = GBP 5.0972 million, which is USD 6.6264 million at 1.30. The USD leg is 0.2925 × 0.9709 + 6.7925 × 0.9426 = USD 6.6866 million. The value is 6.6264 − 6.6866 = –USD 0.06 million. Reversing the sign gives +0.06, and subtracting the legs without converting currencies gives –1.59.

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