1. If forecasted annual interest rates are 7 percent, 10.14 percent and 10.83 percent over the next three years, respectively, and exchange rates over the next years are those in part (k), calculate the cash flows on an 8.75 percent fixed–floating-rate swap of U.S. dollars to Swiss francs at Sf1.50/$.

Use the following balance sheet information (in millions) to construct a swap hedge against interest rate risk exposure.

Assets Liabilities and Equity Rate-sensitive assets $ 50 Rate-sensitive liabilities $ 75 Fixed-rate assets 150 Fixed-rate liabilities 100 Net worth 25 Total assets $200 Total liabilities and equity $200 Rate-sensitive assets are repriced quarterly at the 91-day Treasury bill rate plus 150 basis points. Fixed-rate assets have five years until maturity and are paying 9 percent annually. Rate-sensitive liabilities are repriced quarterly at the 91-day Treasury bill rate plus 100 basis points. Fixed-rate liabilities have two years until maturity and are paying 7 percent annually. Currently, the 91-

day Treasury bill rate is 6.25 percent.