Question

Assume the following information is for a fixed-for-fixed currency swap where the company receives US dollars and pays Euros. The current exchange rate is 1 Dollar to 1.2 Euro. If the present value of the cash flows received is 52.48 Dollars and the present value of the cash flows paid is 32.76 Euros, what is the value of the swap? Assume the home country is the US.

A.$25.18
B-$13.17
C.$19.72
D. -$10.97

Answer 1

The value of the fixed-for-fixed currency swap in question is 25.18 Dollars, after converting the present value of the cash flows paid from Euros to Dollars and subtracting it from the cash flows received.

Step-by-step explanation:

The value of the fixed-for-fixed currency swap can be calculated by converting the present value of the cash flows paid into the same currency as the cash flows received and then subtracting the former from the latter. Given that the current exchange rate is 1 Dollar to 1.2 Euro, we first convert the present value of the Euros paid into Dollars:

(32.76 Euros) × (1 Dollar/1.2 Euro) = 27.3 Dollars

Now, we subtract this amount from the present value of the Dollars received to find the value of the swap:

(52.48 Dollars) - (27.3 Dollars) = 25.18 Dollars

Thus, the value of the swap from the perspective of a company that receives US dollars and pays Euros is 25.18 Dollars, which corresponds to answer choice (A).