Exchange rate agreements and the currency swap

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Reference no: EM13731509

IBM is thinking about issuing a bond in Europe and swapping the annual payments back to US dollars. If fixed rates are 7% in Europe and 9% in the US and the current exchange rate is 1.40 Dollars to every Euro then:

a) What are the payments on a Euro to Dollar swap if IBM wants to issue a 3 year 250 Million Euro bond but end up paying dollars?

b) If IBM goes ahead and issues a 250 Million Euro bond but rather then enter a currency swap executes three forward exchange rate agreements. Show that the present value, of the US incremental cash flows between the forward exchange rate agreements and the currency swap, make both approaches equivalent.

Reference no: EM13731509

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