A hybrid five-year swap contract is designed between A and B that includes currency and interest rate swaps. The contract states that A will receive annual payments in Australian dollars based on a floating interest rate, and B will receive annual payments in New Zealand dollars based on a fixed interest rate. The notional amount involved is AUD100,000, the fixed rate is 6 per cent, and the contracted exchange rate is 1.20 (NZD/AUD). On each payment date, the floating interest rate assumes the values 7.75, 9.75, 5.50, 4.75 and 6.5 per cent, respectively, and the market exchange rate assumes the values 1.25, 1.18, 1.12, 1.30 and 1.15

Required

Determine the payments flows between A and B, and the amount and direction of net payments for this swap contract all in NZD. Clearly mention the currency which has appreciated/depreciated in each flow. [15 marks]

(b) A call option has an exercise exchange rate of 1.7500 (AUD/USD). The premium paid is 0.8 Australian cents per USD. Considering a call option on USD100,000, determine the net payoffs for the holder at the following spot exchange rates

 (i) 1.8000,

(ii) 1.7050,

(iii) 1.7550

(iv) 1.7450

(v) Determine the exchange rate at which the holder of the option will breakeven

Answer rating: 100% (QA)

Answer Notional principal AUD 100000 Contracted exchange rate NZ 12 per AUD Notional principal in NZ ... View the full answer