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Suppose a company is quoting swap rates as follows: 7.75 - 8.10 percent yearly against 6-month dollar LIBOR for dollars and 11.25 - 11.65 percent yearly against six-month dollar LIBOR for British pound sterling. At what rates will company enter into a $/£ currency swap?
Solution: Company will pay annual fixed-rate dollar payments of 7.75 percent against receiving 6-month dollar LIBOR flat, or it will receive fixed-rate annual dollar payments at 8.10 percent in opposition to paying six-month dollar LIBOR flat. Morgan Guaranty will create annual fixed-rate £ payments at 11.25 percent in opposition to receiving six-month dollar LIBOR flat, or it will receive yearly fixed-rate £ payments at 11.65 percent against paying six-month dollar LIBOR flat. So, Morgan Guaranty will enter into a currency swap in which it would pay yearly fixed-rate dollar payments of 7.75 percent in return for receiving semi-annual fixed-rate £ payments at 11.65%, or it will receive annual fixed-rate dollar payments at 8.10 percent in opposition to paying annual fixed-rate £ payments at 11.25 percent.
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