As VP Finance (Europe) at GE Capital, you manage GEs European exposures to currency risk. GEs light

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As VP Finance (Europe) at GE Capital, you manage GE’s European exposures to currency risk. GE’s light bulb plant in Poland generates Polish zloty (Z) after-tax operating cash inflows of Z10 million per year. Your treasury management team decides to hedge one-half of the expected future cash flow from operations (i.e., 5 million zlotys per year) for each of the next five years. Goldman Sachs quotes the following pricing schedule for currency coupon swaps of zlotys and dollars.

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Deduct 20 bps if the bank is paying a fixed rate. Add 20 bps if the bank is receiving a fixed rate. All quotes are against 1-year LIBOR Eurodollar flat. The spot rate of exchange is Z2.80∕$. The dollar and zloty yield curves are flat, with the dollar selling at a forward premium of 3.8 percent per year. Assume bonds in Poland are quoted as a 365-day bond equivalent yield with annual compounding. 

To assist in your calculations, here are present value factors for 5-year annuities at various interest rates from Excel’s PV(RATE,NPER,PMT,FV) function. 

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a. GE has 5-year floating rate dollar debt at 1-year LIBOR + 32 bps. Describe a fully covered dollar-for-zloty swap using the swap pricing schedule. Calculate the all-in cost of GE’s floating rate zloty debt.

b. Solidarity Partners (SP) has Z 19,811,044 of 5-year zloty debt at 10.24 percent compounded annually. SP wants floating rate dollar debt—with interest payments reset annually— to fund its U.S. operations. Calculate the all-in cost of SP’s fully covered zloty-for-dollar swap.

c. What does the swap bank gain from these transactions? 

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