Calculate the Value of Currency Swap for Parties
How can we determine the value of the currency swap for both parties?
Given a currency swap with a remaining life of 15 months involving interest exchange at 10% on GBP 20 million for interest at 6% on AUD 30 million, how do we calculate the value for the party paying sterling (GBP) and the party paying dollars (AUD)?
Calculating the Value of Currency Swap for Parties
Let's calculate the value of the currency swap for both parties, one paying sterling (GBP) and the other paying dollars (AUD).
First, we'll calculate the interest payments for both parties over the remaining life of the swap, which is 15 months.
For the party paying sterling (GBP):
Principal: GBP 20 million
Interest rate in GBP: 10%
Interest rate in AUD: 6%
Exchange rate: 1.8500 (dollars per pound sterling)
The annual interest payment in GBP is: GBP 2,000,000
To convert this to AUD, we use the exchange rate: AUD 1,081,081.08
For the party paying dollars (AUD):
Principal: AUD 30 million
Interest rate in GBP: 10%
Interest rate in AUD: 6%
Exchange rate: 1.8500 (dollars per pound sterling)
The annual interest payment in AUD is: AUD 1,800,000
To convert this to GBP, we use the exchange rate: GBP 3,330,000
Next, we'll calculate the present value of these future interest payments for both parties using the given interest rates.
For the party paying sterling (GBP):
The present value in GBP is: GBP 1,747,988.70
For the party paying dollars (AUD):
The present value in AUD is: AUD 1,670,071.65
Converting the present values back to their respective currencies:
For the party paying sterling (GBP): Present Value (GBP) = GBP 1,747,988.70
For the party paying dollars (AUD): Present Value (AUD) = AUD 1,670,071.65
The currency swap is worth approximately GBP 1,747,988.70 to the party paying sterling (GBP) and about AUD 1,670,071.65 to the party paying dollars (AUD) based on current interest rates and exchange rates.
To calculate the value of the currency swap, we first computed the annual interest payments for both parties and then determined the present value of these future payments using the given interest rates. By converting the present values back to their respective currencies, we can ascertain the value of the swap for each party.
The value of the swap provides insight into the financial impact of the currency exchange for both parties involved. It allows them to evaluate the effectiveness of the swap and make informed decisions regarding their financial strategies.