Running head: WEEK 9-CHAPTER 14 1

International Finance MG760-144

Week 9 Chapter 14

Nazifa Antara Prome

Homework Assignment

Monroe College King Graduate School

WEEK 9- CHAPTER 14 2

2. A corporation enters into a five-year interest rate swap with a swap bank in which it agrees to pay the

swap bank a fixed rate of 9.75 percent annually on a notional amount of 15,000,000 and receive LIBOR.

As of the second reset date, determine the price of the swap from the corporations viewpoint assuming

that the fixed-rate side of the swap has increased to 10.25 percent. (Please show your calculation clearly

and explanation

Answer:

Given,

The present value of the future floating-rate payments the corporation will receive from the swap bank

based on the notional value will be 15,000,000.

The present value of a hypothetical bond issue of 15,000,000 with three remaining 9.75 percent coupon

payments at the new fixed-rate of 10.25 percent is 14,814,304.

15,000,000*9.75%=1,462,500

1,462,500*PVIFA10.25%, 3+15,000,000*PVIFA10.25%, 3.= 14,814,304

This sum represents the present value of the remaining payments the swap bank will receive from the

corporation.

Thus, the swap bank should be willing to buy and the corporation should be willing to sell the swap for

15,000,000 - 14,814,304 = 185,696.

1. A U.S. company needs to raise 50,000,000. It plans to raise this money by issuing dollar-

denominated bonds and using a currency swap to convert the dollars to euros. The company expects

interest rates in both the United States and the euro zone to fall.

(Please show your calculation and explanation)

WEEK 9- CHAPTER 14 3

Answer:

The U.S. Company would pay the interest rate in euros. Because it expects that the interest rate in the

euro zone will fall in the future, it should choose a swap with a floating rate on the interest paid in euros

to let the interest rate on its debt float down.

The U.S. Company would receive the interest rate in dollars. Because it expects that the interest rate

in the United States will fall in the future, it should choose a swap with a fixed rate on the interest

received in dollars to prevent the interest rate it receives from going down.
WEEK 9- CHAPTER 14 4

References

F. Jean (20July, 2011). Interest Rate And Currency Swap. Retrieved from

http://finance.wharton.upenn.edu/~bodnarg/courses/nbae/IFM/Chapter14.pdf