Your company has been doing business for some time in Australia under a subsidiary. Your company has decided t to take on construction of a new facility in Australia and will need to make quarterly payments to the construction company starting in 3 months. As a result you are looking into entering a swap to pay USD and receive AUD. Assume the notional principle on the transaction is USD 200,000,000 and the current spot rate is 0.7937 USD / 1 AUD. The current rates below are per annum with continuous compounding.
Time (Year) USA Australia
0.25 0.80% 2.70%
0.5 0.80% 2.80%
0.75 1.00% 2.90%
1 1.00% 3.00%
1.25 1.25% 3.00%
1.5 1.25% 3.00%
1.75 1.50% 3.10%
2 1.50% 3.10%
2.25 1.75% 3.20%
2.5 1.75% 3.25%
2.75 2.00% 3.30%
3 2.00% 3.35%
A) What is the fixed rate for USD and AUD in this problem?
B) What are the USD cash flows and the AUD cash flows each quarter?
C) 1.5 years have now passed and the new rates are listed below. The current exchange rate is 0.7915 USD / 1 AUD. What is your current position worth now?
Months USA Australia
0.25 1.60% 3.00%
0.5 1.60% 3.00%
0.75 1.75% 3.25%
1 1.75% 3.25%
1.25 1.90% 3.40%
1.5 2.00% 3.40%