Kaplan Question Bank Currency Swaps December 2004

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November 21, 2018 at 5:02 pm #485410
w01122
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Hi John,

for Bi, I’m struggling to understand the worst case and best case scenarios for Year 3. Could you please explain the calculation for how they get to 20.07 and 25.75?

Thanks,
November 22, 2018 at 9:01 am #485473
John Moffat
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I do not have the Kaplan book (only the BPP Revision Kit). However I do have the actual exam question, and I guess that Kaplan’s answer is the same as examiners answer 🙂

For the time 3 inflow of 4,040, the principal of 2,000 is converted at the current spot rate of 85.40 (as per the question) and the remaining 2,040 is converted at the spot rate in 3 years time.
So, using worst case rates, the PV is:

((2,000/85.4) + (2,040/288.23)) x 0.658 = 20.07

Using best case rates:

((2,000/85.4) + (2,040/129.88)) x 0.658 = 25.75
November 22, 2018 at 1:00 pm #485503
w01122
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A follow up question on that: why do we use the PV for years 0-2 but use the non-discounted CFs for year 3? I had done your calculation above, but using the Present Value figures for all years 0-3

Thanks,
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