Purchase Solution

# Currency Swaps: change in interest rates

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You helped me with a swap problem earlier (posting PC11892). I have another question based upon that information.
In the cash market, an American Bank (A) can issue either yen 1 billion worth of bonds yielding 5.3% p.a. and priced at par or \$10 million worth of bonds yielding 6.5% p.a. and priced at par. At the same time, a Japanese bank (B) can either issue yen 1 billion worth of bonds yielding 5.5% p.a. and priced at par of \$10 million worth of bonds yielding 6% p.a. and priced at par. Current yen dollar rates are \$0.01/yen. After the swap, the American Bank prefers to make payments in Dollars, and the Japanese Bank prefers to make payments in Yen . All interest payment are annual. An intermediary has concluded a swap deal for both banks. Assume a maturity of 7 years.If a swap intermediary fee is 30 basis points (US\$) and both (A) and (B) gain 20 points from the swap, what are the terms of the spread? Show all payments!

A year later, interest rates decrease as follows:

5.3% - 4.5%, 6.5% to 6.0%, 5.5% to 4.7% and 6% to 5.5%

Which party may be induced to sell their sap and at what price??

##### Solution Summary

Answer to a question on what happens to the parties of a currency swap, already entered into, when interest rates change. Which party may be induced to sell their sap and at what price?

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