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?

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