Given the following swap rates, Charlton Ferguson, Chief Finance Officer of Red Devils Ltd., decides to enter into a four-year currency swap agreement to receive pounds and pay euros, on a notional principal of £33,000,000. The spot exchange rate at the time of the swap is €1.8300/£.

Swap Rates

Years £ bid £ ask € bid € ask

2 4.08% 4.28% 3.10% 3.30%

3 4.18% 4.33% 3.25% 3.48%

4 4.23% 4.48% 3.30% 3.60%

a. Calculate all principal and interest payments, in both pounds and euros, over the life of the currency swap agreement.

b. Assuming that two years into the swap agreement, Charlton Ferguson decides to unwind the swap agreement and settle it in pounds. Assume that a two-year fixed rate of interest on pounds is 4.50%, a two-year fixed rate of interest on euros is 3.80%, and the spot rate of exchange is now €1.7788/£. Find the net settlement amount of unwinding the swap and state who pays to whom the net settlement amount (Red Devils Ltd. pays to swap dealer or swap dealer pays to Red Devils Ltd.).

Answer rating: 100% (QA)

a Currency swap is a contract under which a particular amount of one currency is exchanged for another currency at a predetermined rate Principle amou... View the full answer