7.2. THE FIXED-FOR-FIXED CURRENCY SWAPS 269
Figure 7.2: Swap Rates as quoted in the Financial Times
Euro-C £ Stlg SwFr US $ Yen
06/06/06 bid ask bid ask bid ask bid ask bid ask
1 year 3.42 3.45 4.96 4.99 1.91 1.97 5.46 5.49 0.60 0.62
2 year 3.64 3.67 5.03 5.07 2.26 2.34 5.41 5.43 0.92 0.95
3 year 3.77 3.80 5.08 5.12 2.46 2.54 5.41 5.43 1.18 1.21
4 year 3.86 3.89 5.09 5.14 2.59 2.67 5.42 5.45 1.39 1.42
5 year 3.93 3.96 5.09 5.14 2.69 2.77 5.45 5.47 1.56 1.60
6 year 3.99 4.02 5.09 5.14 2.78 2.86 5.46 5.50 1.71 1.74
7 year 4.05 4.08 5.08 5.12 2.85 2.93 5.49 5.51 1.84 1.87
8 year 4.10 4.13 5.06 5.11 2.91 2.99 5.51 5.54 1.95 1.98
9 year 4.15 4.18 5.04 5.09 2.97 3.05 5.53 5.56 2.04 2.06
10 year 4.20 4.23 5.01 5.07 3.02 3.10 5.55 5.58 2.11 2.14
12 year 4.28 4.31 4.96 5.03 3.08 3.18 5.58 5.62 2.24 2.27
15 year 4.38 4.41 4.88 4.97 3.17 3.27 5.63 5.66 2.38 2.41
20 year 4.47 4.50 4.75 4.88 3.26 3.36 5.66 5.69 2.54 2.57
25 year 4.51 4.54 4.64 4.77 3.27 3.37 5.66 5.70 2.63 2.66
30 year 4.52 4.55 4.56 4.69 3.26 3.36 5.66 5.69 2.67 2.70
Bid and ask rates are as of close of London business. US $ is quoted annual money
actual/360 basis against 3 months Libor, pound and Yen quoted on a semi-annual
actual/365 basis against 6-months Libor, Euro/Swiss Franc rate quoted on annual bond
30/360 basis against 6-month Euribor Libor with the exception of the 1 year rate which is
quoted against 3 month Euribor/Libor. Source: ICAP plcchose between say 3- and 6- or 9-monthLIBOR, the three should be equivalent. In
practice, differences in e.g. liquidity may cause the swap rate to differ, in a minor
way, depending on what the floating-rate part is.
Costs
The swapping bank charges a small annual commission of, say,usd200 on ausd
1m swap, for each payment to be made. Most often this fee is built into the interest
rates, which would raise or lower the quoted rate by a few basis points.
Example 7.3
Suppose that the seven-year yields at par are 3.17 percent onusdand 3.9 percent
oneur. The swap dealer quotes
usd3.15%–3.19%,
eur3.88%–3.92%.
If your swap contract is one where you “borrow”eurand “lend”usd, you would
then pay 3.92 percent on theeur, and receive 3.15 percent on theusd.
Theoretically, the series of future commissions, one per payment, might be re-
placed by a single up-front fee with a comparable present value. Even if this is
seldom done in practice, it is still useful for you to always calculate this number,
so as to have an idea of the overall cost. For a ten-yearusd1m swap at 3 percent
annually that has ausd200 commission per payment, the equivalent up-front com-
mission would be about 200×a(3%, 10 years) = 200×8.530,203 =usd1706, or