Question 3

Consider a five-year currency and interest rate swap, whereby A receives annual payments on Australian dollars and based on a floating interest rate, and B receives annual payments on New Zealand dollars based on a fixed interest rate. The notional involved is AUD100000, the fixed rate is 6 per cent, and he contracted exchange rate is 1.18 (NZD/AUD). If on each payment date, the floating interest rate assumes the values 8.25, 9.75, 5.50, 4.75 and 6 per cent, respectively, and the market exchange rate assumes the values 1.25, 1.15, 1.10, 1.30 and 1.18, then determine the payments made by A to B, and vice versa, and hence the net payments, all in AUD, for the first 3 years (3-periods) of the swap contract.