A swap dealer quotes a euro midrate of 3.8175 percent (APR) in bond
equivalent yield with quarterly compounding for a two-year yen-per-euro currency coupon
swap. The corresponding two-year yen rate is 2.9291 percent (APR) in quarterly
compounded bond equivalent yield. The dealer charges an annual fee of ±8bp (±2bp per
quarter) around the euro swap mid-rate against yen three-month LIBOR flat. The swap
pricing schedule looks like this:
Currency Coupon Swap Pricing Schedule
Maturity Bid (in €) Ask (in €)
2 years 3.7375% 3.8975%
Quotes are against 1-year LIBOR Euroyen flat.
The spot exchange rate is ¥168.264/€.
PVIFA (present value interest factors for annuities) can be used to calculate present value of
annuities; multiply them by the coupon. Useful PVIFA include:
PVIFA(8 periods at the 3.8175%/4 = 0.954375% euro rate) = 7.66707456
PVIFA(8 periods at the 2.9291%/4 = 0.732275% yen rate) = 7.74268838
a. MTT Co. has ¥1,682,640,000 of two-year yen debt at a floating rate of three-month (¥)
LIBOR + 88 bps (MMY), or LIBOR + 22 bps each three months. NTT wants to swap
this into fixed rate euros to fund its European operations. What is the all-in cost of
NTT’s yen-for-euro currency coupon swap?
b. Verify this by calculating the internal rate of return on NTT’s fully covered ¥/€ swap.
c. EuroAnalog, N.V. (EA) has €10 million of two-year fixed rate debt at 4.7508 percent in
bond equivalent yield (BEY). EA wants floating rate yen debt to fund its expansion into
Japan. Identify the all-in cost of EA’s ¥/€ currency coupon swap.
d. Verify this cost by calculating the internal rate of return on EA’s fully covered cash
e. What does the swap bank gain from these transactions? (in basis points EAR)