Forward, Futures and Swap – Practice
1. If the current Canadian foreign exchange rate is $0.805/Can$ (that is U.S
dollars per Canadian dollar) and the six-month futures exchange rate is
$0.80/Can$, what is the implied difference in interest rate between United
States and Canada?
2. Suppose the NASDAQ Index closed at 2,000 points. If the dividend yield is
4% for six months and the annual interest rate is 6%, what is the equilibrium
value of a six-month futures contract on the NASDAQ Index?
3. The price of three-month futures on the British Pound is $1.882 and the spot
price is $1.902. The annual interest rate in the U.S. is 2.5%. Use the futures
price and the spot price to estimate the annual interest rate in U.K.
4.
The U.S. yield curve is flat at 4% and the U.K. yield curve is flat at 5%. The
current exchange rate is 1.85$/£. What will be the swap rate on an agreement
to exchange currency over three-year period? The swap will call for £1M for a
given number of dollars in each year.
5. Consider two firms A and B that can raise funds either at fixed or floating
rates, $10M over 10 years. A want to raise floating and B want to raise fixed.
The following table displays capital costs.
Firm
Fixed
Floating
A
8%
LIBOR+0.2%
B
10%
LIBOR+1.2%
a. What will be the total cost if both firms directly issue fund at their final
desired market?
b. What should be the interest rate swap contract that splits the benefit equally
between the two firms?
6. Consider the following yield curve:
Year
Yield (%)
1
3
2
4
3
5
4
6
What should be the fixed rate in a 4-year IRS contract?