The US interest rate is 4% pa, and the Australian interest rate is 7% pa, both compounding continuously. Lachlin Bank has entered a swap arrangement at a principal of 9 million AUD whereby they need to pay coupons at 7% pa every year in Australian Dollars (AUD) and receives coupons at 9% pa every year in US Dollars (USD).

 

The swap has a remaining life of 2 years, and the exchange rate is 0.6 USD = 1 AUD.

 

Calculate the value of the currency swap to Lachlin Bank in AUD. Assume that the term structure of interest rates is flat for both currencies. Give your answer in millions of dollars to 3 decimal places.

 

Value of the currency swap = $              million AUD

Answer rating: 100% (QA)

To calculate the value of the currency swap to Lachlin Bank we need to calculate the present value o... View the full answer