currency swap valuation confusion

CFA Level II Derivatives
#1

Hi I have a slight confusion regarding valuing currency swap… I might be missing something simple

Consider a swap where you pay $ floating and receive £ fixed…

What schweser does is that it calculates the value of floating dollar payments as present value of floating coupon plus dollar principal and considers that as an outflow

However actually at the end of the term you will receive dollar which you exchanged initially and pay £ principal??? So why shouldn’t PV of payment include floating dollar coupon plus £ principal translated at current exch rate???

#2

The way I do currancy swaps is exactly how schweser calculates it.

I compare the final value, dollar stream + dollar principal vs £ stream vs £ principle. Then depending on which one the question wants in terms of, you would do the conversion the stream + principle. The reason for this is because at the end of the swap, you the party that was receiving the dollar would get back their big dollar initial whilst the party recieving the £ would also recieve their initial £ back.

#3

Nope.

At the outset you received dollars and paid pounds. At the end you’ll pay dollars and receive pounds.

#4

Ohh so I totally thought it wrong… Just to confirm the correct concept now:

Suppose A borrows in $ and B borrows in £

At the start of the term they both will swap principles

Now A has £ and he will pay interest too in £ to B… B has and during the term he will pay interest in right?

At the end A will return £ and B will return $

This now makes good sense

#5

I’m not sure that I understand what you mean by this sentence. A is lending and borrowing £; B is lending £ and borrowing .

It’s princip al s, but, yes: at the outset, A gives $ to B and B gives £ to A.

Absolutely correct.

Yup.

Good to hear!