22.5. Assume that Schering-Plough, a drug manufacturer, has discovered that it is cheaper to manufacture one of

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22.5. Assume that Schering-Plough, a drug manufacturer, has discovered that it is cheaper to manufacture one of its drugs in France than anywhere else. All revenues from the drug will be in the United States. The company estimates that the costs of manufacturing the drug will be €100 million per year and that the factory has a life of 10 years. At the end of the 10 years, a balloon payment on the mortgage from the factory is due.

Net of proceeds from salvage value, the company will have to pay €1 billion at the end of 10 years.

How can the currency risk of this deal be eliminated with a currency swap?

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