Eliminates exchange rate risk for both a and b.

Reference no: EM13739314

67. Come up with a swap (exchange of interest and principal) for parties A and B who have the following borrowing opportunities.

The current exchange rate is $1.60 = €1.00. Company "A" is in Milan, Italy and wishes to borrow $1,000,000 at a floating rate for 5 years and company "B" is a U.S. firm that wants to borrow €625,000 for 5 years at a fixed rate of interest. You are a swap dealer. Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B.

Topic: Miscellaneous Swap Problems

68. Suppose that the swap that you proposed in question 2 is now 4 years old (i.e. there is exactly one year to go on the swap). The fourth payment has already been made. If the spot exchange rate prevailing in year 4 is $1.8778 = €1 and the 1-year forward exchange rate prevailing in year 4 is $1.95 = €1, what is the value of the swap to the party paying dollars? If the swap were initiated today the correct rates would be as shown:
Topic: Miscellaneous Swap Problems

Reference no: EM13739314

Questions Cloud

If a cost of equity of 14.8% and a pre-tax cost of debt : If a cost of equity of 14.8% and a pre-tax cost of debt is 7.5%. The debt-equity ratio is .40 and the tax rate is .34. What is the unlevered cost of capital?

What effect has patronage had on art history : What effect has patronage had on art history? What current forms of patronage exist in the arts? What possible uses and meanings did prehistoric artists have for creating Paleolithic and Neolithic human figurines?

Great corporation has the following capital situation : Great Corporation has the following capital situation.Debt: One thousand bonds were issued five years ago at a coupon rate of 10%. They had 25-year terms and $1,000 face values. They are now selling to yield 9%. The tax rate is 40%

Compare the sculptures of gudea and khafre : Compare the sculptures of Gudea and Khafre. Compare a Chinese pagoda, a Han watchtower, and an Indian stupa. Discuss the Japanese aesthetic for natural materials and give an example.

Eliminates exchange rate risk for both a and b. : The current exchange rate is $1.60 = €1.00. Company "A" is in Milan, Italy and wishes to borrow $1,000,000 at a floating rate for 5 years and company "B" is a U.S. firm that wants to borrow €625,000 for 5 years at a fixed rate of interest. You are a ..

Overall success of the organization : Suggest which HR function you believe to be the most important to the overall success of the organization. Provide one example to support your rationale.

Discuss theme of good shepherd in early christian art : Discuss the theme of the "good shepherd" in Early Christian and Byzantine art. What was its importance to Christians? How did it change over time?

An assistant manager at a local department store : Alexis Morris, an assistant manager at a local department store, gets paid every 2 weeks by direct deposit into her checking account. This account pays no interest and has no minimum balance requirement. Her monthly income is $4,200. Alexis has a "ta..

Discuss the legal requirements from the employer : Discuss the legal requirements from the employer's standpoint in regards to employee discipline, and provide examples of a situation related to each one.

User Account

All Pages