Interest rate and currency swap

Reference no: EM1315829

Currency Swaps, Interest rate swaps with alternative debt issues.

Ashton Bishop is the debt manager for World Telephone, which needs €3.33 billion Euro financing for its operations. Bishop is considering the choice between issuance of debt denominated in:

· Euros (€), or

· U.S. dollars, accompanied by a combined interest rate and currency swap.

Explain one risk World would assume by entering into the combined interest rate and currency swap.

Bishop believes that issuing the U.S.-dollar debt and entering into the swap can lower World's cost of debt by 45 basis points. Immediately after selling the debt issue, World would swap the U.S. dollar payments for Euro payments throughout the maturity of the debt. She assumes a constant currency exchange rate throughout the tenor of the swap.

Exhibit 1 gives details for the two alternative debt issues. Exhibit 2 provides current information about spot currency exchange rates and the 3-year tenor Euro/U.S. Dollar currency and interest rate swap.

Exhibit 1

World Telephone Debt Details

Characteristic	Euro Currency Debt	U.S. Dollar Currency Debt
Par value	€3.33 billion	$3 billion
Term to maturity	3 years	3 years
Fixed interest rate	6.25%	7.75%
Interest payment	Annual	Annual

Exhibit 2

Currency Exchange Rate and Swap Information

Spot currency exchange rate	$0.90 per Euro ($0.90/€1.00)
3-year tenor Euro/U.S. Dollar fixed interest rates	5.80% Euro/7.30% U.S. Dollar

Reference no: EM1315829

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