In preparing the company's financial statements, ALTECO's accountants are faced with valuing the company's positions in three currency and interest...

In preparing the company's financial statements, ALTECO's accountants are faced with valuing the company's positions in three currency and interest rate swaps.

Swap A: 

ALTECO pays 3% p.a. (s.a. compounding) on a principal of US$450m and receives 4% p.a. (s.a. compounding) on a principal of £250 million. Cash flows are exchanged semi-annually and it is exactly six months to the next swap payment date. The swap has eighteen months to run.

Swap B:

ALTECO pays 3.5% p.a. (s.a. compounding) on a principal of US$600m and receives six-month sterling LIBOR on a principal of £400 million. Cash flows are exchanged semi-annually and it is exactly six months to the next swap payment date. The swap has two years to run.

Swap C:

ALTECO pays six-month sterling LIBOR on a principal of £350 million and receives six-month US dollar LIBOR on a principal of US$500 million. Cash flows are exchanged semi-annually and it is exactly six months to the next swap payment date. The swap has three years to run.

The current exchange rate for sterling is £1 = US$1.60 and the LIBOR/swap term structures in the UK and US are as follows (all rates continuously compounded):

Required 

(a) Use the zero coupon valuation method to value the three swaps to ALTECO in US dollars.1 (16 marks

(b) Calculate the duration of Swap C from ALTECO's perspective. Briefly explain your answer.

(4 marks)