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  • Additional Note On Swaps

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    This document provides an additional note on swaps and two examples. It states that for two items to be swapped, they must have equal present value so that the swap is fair to both parties and has a market value of zero when initiated. The first example calculates the yearly fixed dollar payments a company would receive in a currency swap of future euro liabilities. The second example calculates the market value of one party's position in a 3-year currency swap agreement after 1 year given updated interest rates and exchange rate.

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    Additional Note on Swaps

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    This document provides an additional note on swaps and two examples. It states that for two items to be swapped, they must have equal present value so that the swap is fair to both parties and has a market value of zero when initiated. The first example calculates the yearly fixed dollar payments a company would receive in a currency swap of future euro liabilities. The second example calculates the market value of one party's position in a 3-year currency swap agreement after 1 year given updated interest rates and exchange rate.

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    © All Rights Reserved
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    13 views1 page

    Additional Note On Swaps

    Uploaded by

    Mavis
    This document provides an additional note on swaps and two examples. It states that for two items to be swapped, they must have equal present value so that the swap is fair to both parties and has a market value of zero when initiated. The first example calculates the yearly fixed dollar payments a company would receive in a currency swap of future euro liabilities. The second example calculates the market value of one party's position in a 3-year currency swap agreement after 1 year given updated interest rates and exchange rate.

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    © All Rights Reserved
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    MFIN6003 Derivative Securities Dr.

    Huiyan Qiu

    Additional Note on Swaps

    Principle: For two things to be swappable, they must have the same present value.

     The swap is fair to both parties.


     Market value of swap at initiation is zero.

    Example/Exercise 1: Suppose a dollar-based company is facing the following euro payments


    in the future: – €10m in year 1, – €15m in year 2, and – €20m in year 3. The company would
    like to swap the future euro payments into fixed dollar payments in the next three years.
    Would should be the yearly fixed payment in dollar? Assume the current exchange rate is
    1.17 $/€ and dollar-denominated interest rate is 1% and euro-denominated interest rate is
    1.2%, both annual and effective.

    Example/Exercise 2: Two parties A and B entered the following 3-year currency swap.

    $5.4, $5.4, $95.4


    A B
    €3.5, €3.5, €103.5
    Suppose one year later, dollar-denominated interest rate is 5% and euro-denominated
    interest rate is 3%, both annual and effective. The exchange rate one year later is 1.02$/€.
    What is the market value of A’s swap position?

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