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Homework answers / question archive / 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

Finance

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

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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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