An investor enters into a 2-year swap agreement to swap euros at $1.32 per euro. Soon after the swap is created forward prices rise and the new swap price on a similar swap is $1.45. If dollar denominated interest rates are 4.0% and 4.5% on 1- and 2-year zero coupon government bonds, respectively, what is the gain to be made from unwrapping the original swap agreement?

An investor enters into a 2-year swap agreement to swap euros at $1.32 per euro. Soon after the swap is created forward prices rise and the new swap price on a similar swap is $1.45. If dollar denominated interest rates are 4.0% and 4.5% on 1- and 2-year zero coupon government bonds, respectively, what is the gain to be made from unwrapping the original swap agreement?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter27: Multinational Financial Management

Section: Chapter Questions

Problem 7MC

See similar textbooks

Similar questions

Suppose you (U.S. investor) purchase a 5-year, AA-rated Euro bond for par that is paying an annual coupon at the rate equal to 8 percent. The bond has a face value of 1,000 Euros. The spot exchange rate at the time of purchase is USD1.15/EUR. At the end of the year 1, the bond is upgraded to AAA-rated and the yield changes to 7.5% per annum continuous compounding. In addition due to changes in macroeconomic environment, the exchange rate also changed to USD1.25/EUR. Assume that a U.S. investor holds this bond for one year and sells it in the market at the end of year 1. EUR is the abbreviation for Euro and USD is the abbreviation for U.S. dollar. What is the overall gain / loss in U.S. dollars for the U.S. investor at the end of year 1 (t = 1 year)? (Roundoff your answer to four decimal places, in order to get as accurate answer as possible on Canvas. If your answer is -$1.2345, loss of $1.2345, then type your answer as -1.2345.)
An investor enters a short forward contract to sell 100 euros for dollars at exchange rate 1.3 dollars per euro. If the exchange rate at the end of contract is 1.29 dollars per euro, the dollar payoff is (a) −130 (b) − 1 (c) 0 (d) 1 (e) 130 And, The standard deviation of quarterly changes in oil price is 0.65, the standard deviation of quarterly changes in oil futures price is 0.81, and the correlation between the two changes is 0.8. The optimal hedge ratio for a 3-month futures contract is (a) 0.13 (b) 0.64 (c) 0.8 (d) 0.99 (e) 1.25
Assume that you are running an Australia based company which has an account payable of EUR 125,000 due in three months. You decide to hedge out the associated foreign exchange risk using futures contracts. A futures contract of EUR125,000 is selling at A$1.5410 per euro. Suppose the next three days’ settlement prices are A$1.5399, A$1.5480, and A$1.5410. The initial margin of your performance bond account is $2,000 and maintenance margin is $1,500. What is your margin account balance at the end of the first day and what is the balance of this account at the end of the third day?
Suppose that at the present time, one can enter 5-year swaps that exchange LIBOR for 5%. An off-market swap would then be defined as a swap of LIBOR for a fixed rate other than 5%. For example, a firm with 11% coupon debt outstanding might like to convert to synthetic floating-rate debt by entering a swap in which it pays LIBOR and receives a fixed rate of 11%. What up-front payment will be required to induce a counterparty to take the other side of this swap? Assume notional principal is $95 million. (Do not round intermediate calculations. Round your final answer to the nearest dollar amount.)
Consider a 4-year 5% bond swap in euros for 1 million notional value. In other words, there will be three interest payments followed by a final payment of interest plus principal, all made in euros. Assume that the appropriate discount rate is 9% and the spot rate is 1.05 USD/EUR when answering the following questions related to possible swap contracts. a. What is the net present value of the payments described above (in euros)? b. If you want to offset the euro payments with a single USD payment at the end of year two, what is the appropriate amount? (This could be described as a bullet repayment.) c. Alternatively, if you want to offset the euro payments with four equal USD payments at the end of each year, what is the appropriate amount? (This could be described as an annuity repayment.) Show work
An FI is planning to hedge its one-year, 100 million Swiss franc (SF)-denominated loan against exchange rate risk. The current spot rate is $0.60/SF. A 1-year SF futures contract is currently trading at $0.58/SF. SF futures are sold in standardized units of SF125,000. Should the FI be worried about the SF appreciating or depreciating? Should it buy or sell futures to hedge against exchange rate risk exposure? How many futures contracts should it buy or sell if a regression of past spot exchange rates on changes in future exchange rates generates an estimated slope of 1.4? Show exactly how the FI is hedged if it repatriates its principal of SF100 million at year-end, the spot exchange rate of SF at year-end is $0.55/SF, and the forward exchange rate is $0.5443/SF.
A currency swap has a remaining life of 15 months. It involves exchanging interest at 10% on £20 million for interest at 6% on $30 million once a year. The term structure of risk-free interest rates in the United Kingdom is flat at 7% and the term structure of risk-free rates in the United States is flat at 4% (both with annual compounding). The current exchange rate (dollars per pound sterling) is 1.5500. What is the value of the swap to the party paying sterling? What is the value of the swap to the party paying dollars?
At the present time one can enter five-year swaps that exchange LIBOR for 8%. An off-market swap would be defined as a swap of LIBOR for a rate other than 8%. For example, a firm with a 10% coupon debt outstanding might like to convert to synthetic floating-rate debt by entering a swap in which it pays LIBOR and receives a fixed rate of 10%. What up-front payment will be required to induce a counterparty to take the other side of the swap? Assume a notional principal of $10million. Use 8% as discount rate for all horizons.
Suppose that at the present time, one can enter 5-year swaps that exchange LIBOR for 5%. An off-market swap would then be defined as a swap of LIBOR for a fixed rate other than 5%. For example, a firm with 7% coupon debt outstanding might like to convert to synthetic floating-rate debt by entering a swap in which it pays LIBOR and receives a fixed rate of 7%. What up-front payment will be required to induce a counterparty to take the other side of this swap? Assume notional principal is $10 million.
Current USD Interest rates are 7% per annum and AUD rates are 9% per annum, flat for all terms. Current value of AUD is 0.62 USD. Under a FX swap agreement, a financial institution pays 8% per annum in AUD and receives 4% per annum in USD. Notional principals are 12 Million USD and 20 Million AUD. Payments are exchanged every year, with one exchange having just taken place. The swap will last 5 more years. What is the value of the swap to the financial institution?
Suppose that the September 90-day Eurodollar futures contract has a price of $96.4 today. A firm expects to borrow $50 million for 3 months in September at the LIBOR, and intends to use the Eurodollar futures contract to hedge its future borrowing rate. a) What rate can the firm secure today by using the Eurodollar contract? b) Will the firm go long or short the Eurodollar contract? How many contracts will it buy/sell? c) Suppose that the spot 3-month LIBOR is 4% (annualized) in September. Explain how the firm met its objective of locking in a return on its future borrowing.