CFA Level 2 | Derivatives: Valuing Currency Swaps

[@danmchardy6424]

Yep, you just saved my life as well. This makes so much more sense, especially when you just consider the cash flows as if they were of a fixed coupon bond. Thank you so much!

[@mauriciobonaguro5431]

Once again, Fabian saving my life! It is amazing the clarity and simplicity he explains and how he makes such a difficult topic understandable. Hats off.

[@SabrinaDarza]

I can't say this enough but you are an amazing teacher! I had just about given up on this topic but you've made it so clear!

[@FabianMoa]

Happy to hear that, Sabrina. Thanks!

[@alexh.4842]

Hats off to this brilliant material!! I was so lost with the curriculum, and u just saved my life!! Thanks a mio!

[@Sui_Generis0]

Very clear video

[@FabianMoa]

Thanks!

[@jacobsteenhuysen7526]

damn. i have struggled so hard with this. thank you.

[@megabuzu2726]

save a lotsss of time with this one video.

[@timur_kz7443]

Thank you, very clear.

[@FabianMoa]

Great!

[@javiermenendezmathur9759]

Thanks! That was quite helpfull!

[@usta6348]

this is freaking awesome

[@FabianMoa]

Thanks!

[@evilo7456]

Thank you for making everything so simple and clear. Do you actually have another video with interest appreciation for a float_float curreny swap with a very large premium amount? You are amazing!

[@FabianMoa]

You're welcome, Claudia. I don't have an existing video for a float/float currency swap but I will fit it one if I can find time.

[@evilo7456]

@@FabianMoa Much appreciated! :)

[@johnnywong9652]

Thanks a lot!

[@princepreekay4639]

Thank you

[@FabianMoa]

No problem 👌

[@seanaldmcseansington]

to be clear, when we are thinking about valuing these derivatives. Just think, what will I receive less what I will pay. GBP payor is the US company who will receive series of USD CF. Their value is USD cf less GBP cf?

[@FabianMoa]

Yes, you're right.

[@timur_kz7443]

Hi, there is a problem I've been struggling with for a while. Can you explain me please in what cases we raise rate to the power of t (e.g. 1/1.025^0.5) or multiply it and then add 1 like here (e.g. 1/1+0.025*0.5)??? I never can distinguish between two approaches and arrive to different results. 🤷‍♂️

[@FabianMoa]

Ok, some simple rules of thumb. If they mention that the rates are LIBOR/EURIBOR/HIBOR/SIBOR, I will usually use simple interest. If they do not specify the type of rates, I will go with compounding. For Derivatives, they seem to use simple interest to discount (but mainly because it is LIBOR or EURIBOR). In Fixed Income, they use compound interest to discount for interest rate swaps (because they just mentioned spot rates and not LIBOR/EURIBOR). Hope that helps. Thanks for subscribing. Cheers, Fabian

[@timur_kz7443]

@@FabianMoa great. Thank you, Fabian.

[@zafaralam8457]

@@FabianMoa Thanks for clarifying this. That means for any derivatives with interest based on LIBOR EURIBOR we should use simple interest rate to discount. Does this hold true for FRM exam as well?

[@hazwanishairahabrafik2412]

what is the valuation reflect? if negative, is it shows that the CCS is not recommended and it will be potential loss incurred if we entered ?

[@FabianMoa]

The valuation reflects gain or loss (since inception). A negative valuation means an unrealized loss to the party, but if the contract is not terminated, there will be no compensation from the party concerned to the counterparty.

[@spagaling184]

Im struggling with a problem where Company requires a loan in EUR. Then the company decides to borrow USD and enter into a 1 yr foreign currency swap to swap into EUR. What currency would Company A's annual fixed rate paying? Would it be EUR since the company would be receiving a EUR from the swap therefore they will be paying interest in EUR? Thanks Fabian!

[@FabianMoa]

Company A will be paying fixed rate in EUR since they swapped USD to EUR.

[@Bodega180]

Thanks for the video Fabian! I just have a question: what exactly does the valuation number mean when it is positive and what does it mean when it is negative? What does it mean overall? I would appreciate any response. Thanks

[@FabianMoa]

If the value is positive to a party X, means it is an unrealized gain to X (but it is an unrealized loss to Party Y, i.e. the other party). The reverse is true for a negative value.

[@Bodega180]

@@FabianMoa Thank you for the clarification.

[@FabianMoa]

@@Bodega180 you're welcome, Mike

[@itsjusjeffx3]

Hi Fabian, May you help me with a problem for one of my classes? AAA a US auto company wants to build a plant in UK and BBC a UK bus company wants to do built a bus plant in US. It is easier to raise money in US for AAA and in UK for BBC. They both plan to do this and seeing a large spread between foreign exchange buying and selling rates they decide to do the currency conversion via a currency swap. They enter into a swap contract with 3 year term on a principal of $200 million. Spot exchange rate is $2 per pound. AAA raises 100x2= $200 million and gives it to BBC and BBC raises 100 million pounds and gives it to AAA. AAA pays BBc 4% on 100 million pounds and BBC pays AAA 6% on $200 million at the end of each of the next 3 years. The two firms basically exchange their borrowings. The swap end after 3 years and the principals are handed back. Can you try to help us put a dollar value for us of this contract? This is the question that AAA BoD charged you with. You will present your report to AAA’s Board of Directors.

[@FabianMoa]

Hi Jeffrey, You didn't give me the swap rates for USD and GBP so I can't help much. I'm assuming you need the PV of the swap to AAA in USD terms. What you need to do is: 1) Estimate the annual cashflow (from AAA's perspective) on the USD and GBP for the 3 years. 2) Discount the cashflows using the respective swap spot rates. 3) Convert the PV of the GBP cashflows to USD based on the spot exchange rate of GBP 1 = USD 2. 4) The PV of the swap to AAA in USD terms = PV(USD cashflow) - PV(GBP cashflow in USD terms)

[@itsjusjeffx3]

Fabian Moa yes, It was not given by my professor. If we do not have GBP how do I solve it?

[@itsjusjeffx3]

Fabian Moa Also what do you mean by the swap rates? Didn’t AAA swap 200 million USD in exchange for 100m GBP?

[@FabianMoa]

Jeffrey, watch the video on valuing currency swaps, then you will know what the spot rates are for. I assume the question is asking for the valuation of the currency swap for AAA.

[@kelvinchlee96]

👍👍👍