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J C Inc makes annual EUR payments of 8% on a notional of EUR 45,000
J C Inc makes annual EUR payments of 8% on a notional of EUR 45,000. J.C. Inc. receives annual USD payments of 7% on a notional of USD 50,000. Assume that the USD and EUR interest rates are rUSD =4% and rEUR =6%. The swap currently has 4 years until it matures. The next cash flow exchange will occur one year from today. If the current USD/EUR spot rate (at time of valuation) is XNUSD/EUR = 1.15 what is the value of this currency swap for J.C. Inc.?
A. Positive USD 108.45
B. Positive USD 564.78
C. Negative USD 564.78
D. Negative USD 108.45
Expert Solution
Answer to the question:
In the given question first of all we have to calculate one year forward rate of USD/Euro
| Forward Rate = | (1+interest rate USD) |
| Spot Rate | (1+interest rate Euro) |
| Forward rate | 1.04 |
| 1.15 | 1.06 |
|
Forward rate = 1.1283 approximately equal to 1.129 |
Amount Payable in Euro = (45000*8%) = 3600 Euro
Amount payable in USD = 3600*1.129 =4064.40 equation (1)
Amount receivable in USD = 3500 equation (2)
Deduct equation (2) from (1) we get that value of swap to JC Inc = 564 USD payable,
which is approximately equal to option (c) negative 564.78
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