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A pound 50 million interest rate swap has a remaining life of 10 months. Under the terms of the swap, six month LIBOR is exchanged for 12% per annum (compounded semiannually), The average of the bid ask rate being exchanged for six-month LIBOR in swaps for all maturities currently 10% per annum with continuous compounding. The six-month LIBOR rate was 9.6% per annum two months ago. What is the current value of the swap to the party paying floating? What is its value to the party paying fixed? b) Johnson Plc., a British manufacturer, wishes to borrow US dollars at a fixed rate of interest. Instell Inc, a US multinational, wishes to borrow sterling at a fixed rate of interest. They have been quoted the following rates per annum (adjusted for tax effects): Design a swap that will net a bank, acting as intermediary, 10 basis points per annum and which will produce a gain of 15 basis points per annum for each of the two companies. c) A financial institution has entered into a 10-year currency swap with company Y. Under the terms of the swap, it receives interest at 3% per annum in Swiss francs and pays interest at 8% per in US dollars. Interest payments are exchanged once a year. The principal amounts are $7 million and 10 million francs. Suppose that company Y defaults at the end of year 6 when the exchange rate is $0.80 per franc. What is the cost to the financial institution? Assume that at the end of year 6, the interest rate is 3% per annum in Swiss francs and 8% per annum in US dollars for all maturities. All rates are quoted with annual compounding

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