The present value of the series of dollar payments in a currency swap per $1 notional amount is $0.03.The present value of the series of euro payments in the same currency swap per €1 is €0.0225.The current exchange rate is $1.05 per euro.If the swap has a notional amount of $100 million and €105 million,find the market value of the swap from the perspective of the party paying euros and receiving dollars.
A)$519,375
B)-$2,480,625
C)$3,000,000
D)-$3,000,000
E)-$519,375

Question

Quizplus · Accepted Answer

The market value of the swap is calculated by finding the difference in present values of the payments in each currency, converted to a common currency using the exchange rate. The present value of dollar payments is $3 million ($0.03 * $100 million), and the present value of euro payments is €2,362,500 (€0.0225 * €105 million). Converting the euro payments to dollars gives $2,480,625 (€2,362,500 * $1.05). The market value from the perspective of the party paying euros is $3 million - $2,480,625 = $519,375.

The Present Value of the Series of Dollar Payments in a Currency