Could anyone assist with the answers for questions 113 and 114 on the Kaplan Schweser 2018 Volume 1 Mock #2 exam. The questions have to do with currency swaps. I am getting confused with the ending calculations as I thought that you could just take the difference between the rates (Adjusted for time) and multiply by the notional. Thanks in advance!
Additional Information
Initial Exchange rate 0.0893 usd/peso
Notional=$100 million
Term structure of rates
US Rates Mexican Rates
- 4% 5%
720 4.5% 5.2%
Exchange rate after 6 months is 0.085 usd/peso
Term Structure (New)
US Rates Mexican Rates
180 4.2% 5%
540 4.8% 5.2%
113.Calculate the PV of the dollar fixed payments for the 2 year currency swap six months after initial analysis
- Calculate the value of the currency swap from the perspective of tge counterparty paying dollars six months after initial analysis.
Did you make sure to convert dollars to pesos at initiation on the receive peso side (which is equivalent to the pay dollar side) to figure out what the notional is in peso terms? You then have to convert the PV of peso cash flows and notional back to dollars at the end of the calculation using the current exchange rate at the time. You then compare the output from that vs. what the pay dollar side is paying to get the answer.
Not sure if you did that and are still having trouble, so maybe provide more specifics on what you’re doing step by step and we can provide more of an assist.
In that Sawp you are a Peso payer and USD receiver (at inception you deliver USD 100 for 1,119.82 pesos)
---- SFR1 (USD) ----
Z360 = 1 / (1 + 4% *360/360) = .9615
Z720 = 1 / (1 + 4.5% *720/360) = .9174
SFR = 1 - 0.9174 / (0.9615 + 0.9174) = 4.4%
PMT = 4.4 M per year
— SFR2 (USD) —
Z180 = .9794
Z540 = .9328
PV(dolar Fix pmt) = 0.9794 * 4.4 + 0.9328 * 104.4 = 101.69 (A 113)
Similarly the SFR1 (pesos) is 5.07% --> PMT = 5.07% * 1,119.82 = 56.77
and similarly Z180 = .9756 and Z540 = .9276
PV (peso pmt) = 0.9756 * 56.77 + 0.9276 * 1,176.59 = 1,146.79 (pesos) —> *0.085 USD/pesos = 97.48 USD
97.48 - 101.69 = -4.21 (A114)