Currency Swap Valuation
A French company, Verne, needs to borrow USD 100,000,000 for one year to build a new research facility. To start, the company issues bonds in an equivalent amount to USD 100,000,000 in EUR and then enters into a quarterly reset currency swap with notional exchanges at initiation (spot USD/EUR 1) and expiration. The fixed rates are 0.05% per period for EUR and 0.50% per period for USD.
Now, assume 90 days have passed. The sum of the present value factors for the spot rates is 3.9960 for EUR and 3.9905 for USD with the final present value 0.9975 for EUR and 0.9950 for USD. The currency spot rate for EUR/USD is 1. The current value of the currency swap entered into 90 days ago will be _closest_ to:
That's not it.
The present value of the future USD spot rates must be taken into account, along with the final present value.
No.
The current value of the notional exchanged must factor in the present value of the spot rates plus the final present value figure.
Yes!
Use the currency swap value equation.
$$\displaystyle V_{CS} = NA_{USD} \left( r_{FIX,USD} \sum^{n}_{i=1} PV_i(1) + PV_n(1) \right) - S_t NA_{EUR} \left( r_{FIX,EUR} \sum^{n}_{i=1} PV_i(1) + PV_n(1) \right)$$
Then compute from there.
$$\displaystyle 100{,}000{,}000[0.005(3.9905) + 0.9950] - 1(100{,}000{,}000)[0.0005(3.9960) + 0.9975] = \mbox{USD} 1{,}545{,}450$$
USD 1,500,000.
USD 1,545,500.
USD 101,000,000.
