4. At time t, Airbus borrows ¥12.8 billion at an interest rate of 1.2%, paid semiannually, for a period of two years. It then enters into a two-year Japanese yen/U.S.

dollar swap with Deutsche Bank (DB) on a notional principal amount of $100 million (¥12.8 billion at the current spot rate). Every six months, Airbus pays DB U.S. dollar LIBOR6, while DB makes payments to Airbus of 1.3% annually in Japanese yen. At maturity, DB and Airbus reverse the notional principals. Assume that LIBOR6 (annualized) and the ¥/$ exchange rate evolve as follows:

Time

(months) LIBOR6 ¥/$ spot Net US$ receipt (+)/

payment (−)

t 5.7% 128 t + 6 5.4% 132 t + 12 5.3% 137 t + 18 5.9% 131 t + 24 5.8% 123

(a) Calculate the net U.S. dollar amount that Airbus pays to DB (“−”) or receives from DB (“+”) in each six-month period.

(b) What is the all-in U.S. dollar cost of Airbus’ loan?

(c) Suppose Airbus decides at t + 18 to use a six-month forward contract to hedge the t + 24 receipt of Japanese yen from DB. Six-month interest rates (annualized) at t + 18 are 5.9% in U.S. dollars and 2.1%
in Japanese yen. With this hedge in place, what fixed U.S. dollar amount would Airbus have paid (received)
at time t + 24? How does this amount compare to the t + 24 net payment computed in part a?

(d) Does it make sense for Airbus to hedge its receipt of Japanese yen from DB? Explain.