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10 August, 15:56

Suppose that you have entered a 5-year swap to receive Japanese Yen and Pay 1-year Libor with notional principal of USD 10,000,000. At the time the swap agreement was completed the swap quote was 0.50% bid and 0.60% offered against the 1-year dollar Libor, and the spot rate was JPY100/$ (assume payments are annual). Assume that 1 year has passed. The spot exchange rate is JPY 98/USD. The dealer is quoting the following interest rates on 4-year swaps: 1.50% bid and 1.60% offered against the 1-year dollar Libor. You want to close out the swap. What is your net dollar cashflow?

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  1. 10 August, 18:26
    0
    Net Dollar Outflow = $3,00,000

    Explanation:

    Notional Principal: $10,000,000

    Spot Rate: $100

    JPY: 100000

    Rate Offered: 0.006

    After 1 year has passed, spot rate: JPY 98/$

    Loss of Spot: 2/$

    Rate Offered on 4-Year Swap: 0.016

    Rate Offered for 2nd year: 0.016/4

    : 0.004

    First Year Interest: Notional Principal * Rate Offered

    : $10,000,000 * 0.006

    : $60,000

    Second Year Interest: Notional Principal * Rate Offered for 2nd year

    : $10,000,000 * 0.004

    : $40,000

    Loss: JPY * Loss of Spot

    : 100000 * 2/$

    : 200000

    Net Dollar Outflow: First-Year Interest + Second Year Interest + Loss

    : $60,000 + $40,000 + $2,00,000

    : $3,00,000
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