Purchase Solution

Compute the Value of a Currency Swap between Two Companies

Not what you're looking for?

Ask Custom Question

I am a national banker, who has approached two of my multi-national clients to offer to construct a currency swap that will enable both parties to better manage interest rate and Forex risk exposures.

Company A has borrowed $20 million and Company B has borrowed GBP 11 million. Each wishes to swap in the others currency. The current spot exchange rate is GBP/$ 2.800.

In the Debt markets, the interest rates are as follows:
Co. A Co. B
$ (fixed rate) 9.3% 9.7%
GBP (fixed rate) 8.1% 8.8%

Any gain obtained from the swap will be split evenly between the companies after the bank has taken its share of 0.1%.

a) Diagramatically, show the initial cash flows associated with the swap
b) Diagramatically, show the interest rate flows that will occur from the 1st interest payment date
c) At the end of the swap, final interest rates will be exchanged and the principal amounts will be re-exchanged. Assume that the spot rate has moved to GBP/$2.65. Digramatically, show all the interest rate flows and principal amt flows that will occur at the swap agreement expiry date.
d) Will either company realise a Forex loss at this time?

Purchase this Solution
Solution Summary

This solution assists in computing the value of a currency swap between Company A and Company B.

Purchase this Solution
Free BrainMass Quizzes
Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Employee Orientation

Test your knowledge of employee orientation with this fun and informative quiz. This quiz is meant for beginner and advanced students as well as professionals already working in the HR field.

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Basics of corporate finance

These questions will test you on your knowledge of finance.

View More Free Quizzes
Related BrainMass Solutions

  • Swap driven financing the defining features of interest

    Generally, currency swaps transact at inception with a net present value of zero. Over the life of the instrument, the currency swap can go in-the-money, out-of-the-money or it can stay at-the-money.

  • Use of Financial Derivatives

    A currency swap helps a company to limit their losses due to fluctuations between two countries' currencies.

  • Strategies in Addressing Foreign Exchange Risk

    A currency swap allows the two counter parties to swap interest rate commitments on borrowings in different currencies.

  • Comparing Currency Swaps, Interest Rate Swaps and Equity Swaps

    Retrieved from http://m.risk.net/digital_assets/4927/v5n3a4.pdf This solution provides a detailed 300-word definition of interest rate swaps, currency swaps, and equity swaps, discussing the benefits and drawbacks of each type of swap for the companies

  • Walt Disney Company's Yen Financing

    In light of the various other techniques for hedging currency exposures why the market for currency swap does exists? Who benefits and who looses in such an agreement? Can a swap really create value for a corporation?

  • Global business

    The factors, in turn, impact other important considerations such as cost of capital and most importantly, exchange rates between two countries.

  • Swaps Usefulness and Benefits

    The most commonly entered into type of swap is the interest rate swap. Two commonly traded types are fixed vs. variable rate swaps or a LIBOR - Prime rate swaps.

  • Fx Swap and Locational Arbitrage

    """Swap rate is the difference, whether positive or negative, between the forward exchange rate and the spot rate for a given currency, usually expressed in points.""

  • Foreign Exchange Transaction: Spot, Forward & Swap

    Therefore, a foreign exchange swap has a value date ahead and another behind and two agreed exchange rates.

View More Related Solutions