CAS Exam 9 Spring 2013, Question 7

Study guide: Exam 9

Given the following information on a currency swap:

The swap has a remaining life of 15 months.
The swap involves exchanging interest at 9% on £20 million for interest at 5% on $30 million at the end of each year.
Principal amounts will be exchanged when the swap term expires.
The term structure of interest rates in both the United Kingdom and the United States is currently flat and if the swap were negotiated today, the interest rates exchanged would be 6% in pounds sterling and 4% in dollars.
The current exchange rate (dollars per pound sterling) is 1.65.
All interest rates are quoted with annual compounding.

Viewing the swap as a portfolio of forward contracts, calculate the current value of the swap to the party paying pounds sterling.

Part a (2.5 points)

No current syllabus covers this question; it is kept for the record.