- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 9. Currency Swap Contracts

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**CFA Practice Question**

Consider a one-year currency swap with semi-annual payments. The two currencies are the US$ and the euro. The current exchange rate is $0.75/euro. The term structure of interest rates for LIBOR and Euribor are:

B. 0.0784

C. 0.0628

What is the annualized fixed rate in euros?

A. 0.0648

B. 0.0784

C. 0.0628

Correct Answer: A

First we compute the discount factors:

PV_{0}^{euro}(180) = 1 / (1 + 0.06 x 180/360) = 0.9709

PV_{0}^{euro}(360) = 1 / (1 + 0.066 x 360/360) = 0.9381

The fixed rate in euros is: (1/0.5) x (1 - 0.9381) / (0.9709 + 0.9381) = 0.0648

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