Assignment on the swap position

Assignment Help Finance Basics
Reference no: EM133069611

It's not just commodity prices that have been on the move lately. The differential effects of COVID-19 on different countries has caused significant movements in exchange rates. Such volatile FX markets increase the need for financial derivatives to hedge such volatility, but it can also increase the counterparty risk involved in such derivative trades. 

To this end, the financial institution you are working for has a current position in a cross currency interest rate swap and another CHF (Swiss franc) currency futures position. Your boss has asked you to evaluate these two positions. 

The Swap Position

20 months ago, your institution entered into a three-year cross-currency interest rate swap with a Swiss pharmaceutical company. The swap agreement was over-the-counter with the following terms: your institution is to pay 2.35% per annum (with semi-annual compounding) in CHF and receive 6-month LIBOR + 0.60% per annum in AUD. Payments are semi-annual and on a notional principal of AUD15 million. The 6-month LIBOR rate and the spot exchange rate at various dates over the last 20 months are shown in the table below:

Date of observation

6-month LIBOR rate observed

Spot exchange rate observed (AUD for 1 CHF)

     t = 0 (contract initiation) 

1.95%

1.6364

     t = 6 months

0.52%

1.4942

     t = 12 months

0.42%

1.3911

     t = 18 months

0.20%

1.4276

     t = 20 months (today)

0.15%

1.4525

(a) Compute the cash flow paid and received by your financial institution on each payment date of the swap (i.e., at t = 0, 6, 12, and 18 months).

(b) Unfortunately for you and your institution, the counterparty to the swap (the Swiss pharmaceutical company) has just filed for bankruptcy with 16 months remaining on the swap agreement. Determine the current value of the swap agreement (and ultimately the cost) to your institution. You should assume that the current interest rate is 1.20% per annum in AUD and 0.15% per annum in CHF (with continuous compounding) for all maturities.

The Futures Position

(c) Worried about a volatile exchange rate, eight months ago your institution also entered into a short position in 2-year currency futures contracts on CHF10 million. At the time, the interest rate was 1.55% per annum in AUD and 0.10% per annum in CHF (with continuous compounding) for all maturities. Your boss asks you the following questions:

i. What was the value of the futures position eight months ago? ii. If we closed out the position today, what would be the profit/loss on the futures transaction?[1]

Reference no: EM133069611

Questions Cloud

Making the desired withdrawals after retirement : You are celebrating your 40th birthday today. You want to start saving for your anticipated retirement at age 65. You want to be able to withdraw $100,000 from
Consumer web services startup-electronic device company : Describe and contrast the operational challenges faced consumer Web services startup, iPhone application company, and electronic device company.
What is the price of the 4-year : A 4-year 6.8% coupon bond is selling to yield 7%. The bond pays interest annually. One year later interest rates decrease from 6.8% to 6.2%.
Determine the capitalized cost of the coal mine : Identify all items that the company has reported as Other Comprehensive Income and What is the significance of classifying an item as other comprehensive income
Assignment on the swap position : It's not just commodity prices that have been on the move lately. The differential effects of COVID-19 on different countries has caused significant movements i
Create personal action plan based on skills : Create a personal action plan based on skills you learned in this course and in the program.
What is working capital : Q2. Why do you think that the working capital for a showroom selling BMW cars and a Seven 11store will need different amounts of working capital?.
Derive the maximum expected decline in the gbp : Assume that you work for a U.S. ?rm that conducts most of its international business in England and has cash in?ows in pounds (GBP). The current GBP spot rate i
Estimate company maximum expected loss : Assume that you work for company that conducts most of its international business in Mexico and estimates its net cash ?ows next quarter from Mexico will be $20

Reviews

Write a Review

Finance Basics Questions & Answers

  Financial reporting and analysis

Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..

  A report on financial accounting

This report is specific for a core understanding for Financial Accounting and its relevant factors.

  Describe the types of financial ratios

Describe the types of financial ratios and other financial performance measures that are used during venture's successful life cycle.

  Differences between sole proprietorship and corporation

Briefly describe the major differences between a sole proprietorship and a corporation

  Prepare a cash budget statement

Calculate the expected value of the apartment in 20 years' time. What is the mortgage loan repayment at the beginning of each month

  What are the implied interest rates

What are the implied interest rates in Europe and the U.S.?

  State pricing theory and no-arbitrage pricing theory

State pricing theory and no-arbitrage pricing theory

  Small business administration

Identify the likely stage for each venture and describe the type of financing each venture is likely to be seeking and identify potential sources for that financing.

  Effect of financial leverage

The Effect of Financial Leverage and working capital management

  Evaluate the basis for the payment to the lender

Evaluate the basis for the payment to the lender and basis for the payment to the company-counterparty.

  Importance of opps, ipps, mpfs and dmepos

Research and discuss the differences and importance of : OPPS, IPPS, MPFS and DMEPOS.

  Time value of money

Time Value of Money project

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd