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Suppose that the term structure of interest rates is flat in the UK and Australia. The...

Suppose that the term structure of interest rates is flat in the UK and Australia. The UK interest rate is 0.5% per annum and the AUD rate is 1.5% per annum. The current value of the AUD is 0.59 GBP. Under the terms of a swap agreement a financial institution pays 1.3% per annum in AUD and receives 0.2% per annum in GBP. The principals in the two currencies are £ 23 million and 40 million AUD. Payments are exchanged every year with one exchange having just taken place. The swap will last two more years. Assume all interest rates are continuously compounded.

  1. a) What is the value of the swap to the financial institutions?
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