What is the value of the swap to the financial institution

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Suppose that the term structure of interest rates is flat in the United States and Australia. The interest rate in the United States is 5% and the Australian rate is 7%. The current value of one Australian dollar is 0.6 US dollars. Under the terms of the agreement, a financial institution pays 7% per annum in Australian dollars and receives 4% per annum in US dollars. The principals in the two currencies are $10 million US dollars and 20 million Australian dollars. Payments are exchanged once a year, with one exchange having just taken place. The swap will last two more years. What is the value of the swap to the financial institution?

Reference no: EM132675669

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