User A bank has a currency swap with a remaining time to maturity of 3 years. Under the terms of the contract, the bank receives 5.5% on the nominal amount 100 mio EUR and pays 7.5% on 150 mio USD with a yearly frequency. The term structure of interest rates is flat at 2.5% for EUR and 2.5% for USD (both continuous compounding). The current exchange rate is 0.645 EUR for one USD. Calculate the value of the swap by considering it as a bundle of forward contracts.
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To calculate the value of the currency swap we can break it down into a bundle of forward contractsView the full answer