Question 3 Swap

Part a)

Suppose that the term structure of risk-free interest rates is flat in both Japan and the United States. The Japanese rate is 4% per annum and the U.S. rate is 9% per annum (both with continuous compounding). Some time ago, a financial institution entered into a currency swap in which it receives 5% per annum in yen and pays 8% per annum in dollars once a year. The principals in the two currencies are $20 million and 2,400 million yen and they will be paid at the end of the contract. The swap will last for another three years, and the current exchange rate is 105 yen = $1.

Required

1. Calculate the value of swap contract.[15 marks]
2. What was the value of the swap contract when it was first signed?

[5 marks]