An Interest-Only Currency Swap Has a Remaining Life of 18

Essay

An interest-only currency swap has a remaining life of 18 months.It involves exchanging interest at 14 percent on £20 million for interest at 10 percent on $14 million once a year.The term structure of interest rates is currently flat in both the U.S.and in the U.K.If the swap were negotiated today the interest rates exchanged would be $8 percent and £11 percent.All rates were quoted with annual compounding.The current exchange rate is $1.95 = £1.What is the value of the swap to the party paying dollars?