Could someone please explain this problem to me in detail? I don’t know why but I am just not able to figure the problems out…thanks… 90 days ago the exchange rate for the Canadian dollar (C$) was 0.83 and the term structure was 180 days 360 days LIBOR 5.6% 6% CDN 4.8% 5.4%. A swap was initiated with payments of 5.3 percent fixed in C and floating rate payments in USD on a notional principal of USD 1 million with semiannual payments. 90 days have passed, the exchange rate for C$ is $0.84 and the yield curve is 90 days 270 days LIBOR 5.2% 5.6% CDN 4.8% 5.4% What is the value of the swap to the floating-rate payer? A) $10,125. B) -$2,708. C) $3,472. D) -$3,472. Your answer: A was correct! The present value of the USD floating-rate payments is 1.028/1.013 = 1.014808 × 1,000,000 = 1,014,807. The present value of the fixed C payments per 1 CDN is 0.0265/ 1.012 + 1.0265/1.0405 = 1.012731 and for the whole swap amount, in USD is 1.012731 × 0.84 × 1,000,000/.83 = $1,024,932. -1,014,807 + 1,024,932 = $10,125.
what exactly are you not sure about? how to calculate present value of floating rate payments, fixed payments?
here goes: Start with 90 days out. the rates today dont matter much, only to figure out the first floating rate payment which is 5.6/2= 2.8 so now you have a swap that pays 5.3/2 =2.65 C$ and recieves 2.8 USD in 180 days so fast forward 90 days… we want to calc value. so first do the C$ side. calc the discount factors from the new rates, 1/(1+(.048/4))=.9881 and 1/(1+(.054*(270/360)) = .9611 discount the payments of the fixed leg which are 0.265*.9881 + 1.0265*.9611 = 1.0128 C$ convert this to usd by 1.0128*.84/.83 = 1.025 the floating rate side is easier, just take the first payment which is .028 (see above), add 1 (since you get par at the first payment effectively), and discount back by the usd discount rate at 90 days 1.028* 1/(1+(.056/4)) = 1.0148 Pay - Rec is now 1.025 - 1.0148 = .0102. multiply by notional, and you have approx 10,200. hope that helps.
Thanks Mike…I kinda got it now…yea…just confused about the math .thats all…
sure thing. these things are confusing. repetition is the best way… do that problem again in a week and make sure u can do it over again