Suppose that the payoff from a derivative will occur in ten years and will equal the three-year

Question:

Suppose that the payoff from a derivative will occur in ten years and will equal the three-year U.S. dollar swap rate for a semiannual-pay swap observed at that time applied to a certain principal. Assume that the swap yield curve is flat at 8% (semiannually compounded) per annum in dollars and 3% (semiannually compounded) in yen. The forward swap rate volatility is 18%, the volatility of the ten year "yen per dollar" forward exchange rate is 12%, and the correlation between this exchange rate and U.S. dollar interest rates is 0.25.

(a) What is the value of the derivative if the swap rate is applied to a principal of $100 million so that the payoff is in dollars?

(b) What is its value of the derivative if the swap rate is applied to a principal of 100 million yen so that the payoff is in yen?

Assume that risk-free rates are 2% in yen and 6% in dollars (both semiannually compounded).

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...