What are two approaches in valuation of currency swap

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1. List three applications of swaps.

2. What are the two approaches in valuation of currency swap?

3. Firm IBM is in a currency swap that was initiated several years ago. According to the swap, IBM receives 8% in sterling and pays 10% in dollar annually, plus the exchange of the principles at initiation and maturity. The principal amounts in the two currencies are 15 million dollars and 10 million pounds. Currently, there are two years remaining in the swap. The spot exchange rate is $1.5 per pound. The simple interest rates are 5% for US and 5% for UK per annum.

a. What is the current value of the swap to IBM?

b. If the value of the swap becomes zero to IBM after the coupon exchange one year later and the US and UK interest rates remain at 5%, what must the spot exchange rate be one year later?

Reference no: EM133272647

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