Lecture 6, Unwinding Swaps
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file: lecture 6, unwinding swaps.xls UNWINDING SWAPS Original Swap: TERMS: (I) Party receives 8% DOL, and pays 10% in French Franc. Duration of Swap is 5 years FF|$ rate is 5FF=1$, Notional in Dollars is 100m and hence in FF is 500 Receive Pay Dollars FF 0 -$100.00 500.00 F 1 $8.00 -50.00 F 2 $8.00 -50.00 F 3 $8.00 -50.00 F 4 $8.00 -50.00 F 5 $108.00 -550.00 F This is the swap of FF and dollar cash flows. UNWINDING SWAP: Suppose new FX is 10 FF=1$ after 1 year and the terms of offsetting swap are pay 6% dollars and receive 9% for 4 ye Thus, the FF has depreciated against the dollar. OFFSETTING SWAP Receive Pay Pay Receive Net FF Dollars FF Dollars FF from Swap 0 -$100.00 500.00 F 1 $8.00 -50.00 F 2 $8.00 -50.00 F -$8.00 96.237 F 46.2371901 3 $8.00 -50.00 F -$8.00 96.237 F 46.2371901 4 $8.00 -50.00 F -$8.00 96.237 F 46.2371901 5 $108.00 -550.00 F -$108.00 1,165.539 F 615.5393024 PV of ($106.93) PV of F 553.1035129
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Transcript of Lecture 6, Unwinding Swaps
unwinding swap cash flowsfile: lecture 6, unwinding swaps.xlsUNWINDING SWAPSOriginal Swap: TERMS: (I) Party receives 8% DOL, and pays 10% in French Franc.Duration of Swap is 5 yearsFF|$ rate is 5FF=1$, Notional in Dollars is 100m and hence in FF is 500ReceivePayDollarsFF0-$100.00500.00 F1$8.00-50.00 F2$8.00-50.00 F3$8.00-50.00 F4$8.00-50.00 F5$108.00-550.00 FThis is the swap of FF and dollar cash flows.UNWINDING SWAP:Suppose new FX is 10 FF=1$ after 1 year and the terms ofoffsetting swap are pay 6% dollars and receive 9% for 4 yearsThus, the FF has depreciated against the dollar.OFFSETTING SWAPReceivePayPayReceiveNet FFDollarsFFDollarsFFfrom Swap0-$100.00500.00 F1$8.00-50.00 F2$8.00-50.00 F-$8.0096.237 F46.23719010293$8.00-50.00 F-$8.0096.237 F46.23719010294$8.00-50.00 F-$8.0096.237 F46.23719010295$108.00-550.00 F-$108.001,165.539 F615.5393023569PV of($106.93)PV of FF553.1035128687Dollarsat 9%FF equivalent1069.302112254(i) Compute the number in cell F37 as npv @6%(ii) compute the notional for FF swap as cell c37 multiplied by 10 (new fx rate)=1069.3(iii) compute the net in cells i32 through i35 as PV @9%(iv) Thus the party would require 553.10 m FF to take it out of the original swap and take the new swapUNWINDING SWAP:Suppose new FX is 2.5 FF=1$ after 1 year and the terms ofoffsetting swap are pay 6% dollars and receive 9% for 4 yearsThus, FF is appreciatingOFFSETTING SWAPReceivePayPayReceiveNet FFDollarsFFDollarsFFfrom Swap0-$100.00500.00 F1$8.00-50.00 F2$8.00-50.00 F-$8.0024.059 F-25.941 F3$8.00-50.00 F-$8.0024.059 F-25.941 F4$8.00-50.00 F-$8.0024.059 F-25.941 F5$108.00-550.00 F-$108.00291.385 F-258.615 FPV of($106.93)-248.873 FDollarsFF equivalent267.3255280635(Thus the party would pay 248mFF to take it out of the original swap and take the new swap
