file: lecture 6, unwinding swaps.

xls
UNWINDING SWAPS
Original Swap: TERMS: (I) Party receives 8% DOL, and pays 10% in French Franc.
Duration of Swap is 5 years
FF|$ rate is 5FF=1$, Notional in Dollars is 100m and hence in FF is 500

0
1
2
3
4
5

Receive
Pay
Dollars
FF
-$100.00
500.00 F
$8.00
-50.00 F
$8.00
-50.00 F
$8.00
-50.00 F
$8.00
-50.00 F
$108.00
-550.00 F

This is the swap of FF and dollar cash flows.

UNWINDING SWAP:
Suppose new FX is 10 FF=1$ after 1 year and the terms of
offsetting swap are pay 6% dollars and receive 9% for 4 years
Thus, the FF has depreciated against the dollar.
OFFSETTING SWAP
Receive
Pay
Pay
Receive
Net FF
Dollars
FF
Dollars
FF
from Swap
0 -$100.00
500.00 F
1
$8.00
-50.00 F
2
$8.00
-50.00 F
-$8.00
96.237 F
46.2371901
3
$8.00
-50.00 F
-$8.00
96.237 F
46.2371901
4
$8.00
-50.00 F
-$8.00
96.237 F
46.2371901
5
$108.00
-550.00 F
-$108.00 1,165.539 F
615.5393024
PV of

($106.93)

PV of F 553.1035129

Dollars
at 9%
FF equivale 1069.30211
(i) Compute the number in cell F37 as npv @6%
(ii) compute the notional for FF swap as cell c37 multiplied by 10 (new fx rate)=1069.3
(iii) compute the net in cells i32 through i35 as PV @9%
(iv) Thus the party would require 553.10 m FF to take it out of the original swap and take the new swap

UNWINDING SWAP:

0
1
2
3
4
5

Suppose new FX is 2.5 FF=1$ after 1 year and the terms of

offsetting swap are pay 6% dollars and receive 9% for 4 years
Thus, FF is appreciating
OFFSETTING SWAP
Pay
Receive
Dollars
FF

Receive
Pay
Dollars
FF
-$100.00
500.00 F
$8.00
-50.00 F
$8.00
-50.00 F
$8.00
-50.00 F
$8.00
-50.00 F
$108.00
-550.00 F

-$8.00
-$8.00
-$8.00
-$108.00
PV of
Dollars

($106.93)

24.059 F
24.059 F
24.059 F
291.385 F

Net FF
from Swap

-25.941 F
-25.941 F
-25.941 F
-258.615 F
-248.873 F

FF equivale 267.325528
(Thus the party would pay 248mFF to take it out of the original swap and take the new swap

ake the new swap