A USD 100 million loan is swapped into a JPY 10 billion loan. The spot exchange rate is JPY/USD 100. The interest rates on dollars and yen are 6% and 2% respectively. The maturity of the contract is five years, and the interests are swapped once a year. At the time of contracting, the swap rates were equal to the YTM on five-year bonds in dollars (6%) and yen (2%).

One year later, the yield curves in dollars and yen become flat and that interest rates have dropped to 5% on dollar bonds and 1% on yen bonds. The spot exchange rate also dropped to JPY/USD 90. What is the value of this currency swap if you want to terminate it immediately right after the first payment?

Answer rating: 100% (QA)

Answer USD Partys Cash Flow Impact Year 1 Gain USD 6 million USD interest received Loss USD 2 million JPY interest converted to USD at initial rate Ne... View the full answer