Ingrid Niemman, a treasurer at a German company, believes interest rates are going to rise, so she wants to swap her future floating-rate interest payments for fixed rates. Presently, she is paying per annum on €5,000,000 of debt for the next two years, with payments due semiannually.

EURIBOR is currently 4.00 % per annum. Ingrid has just made an interest payment today, so the next payment is due six months from today. Ingrid finds that she can swap her current floating rate payments for fixed payments of 7.00 % per annum.

(The company’s weighted average cost of capital is 12%, which Ingrid calculates to be 6% per 6-month period, compounded semiannually.)

a. If EURIBOR rises at the rate of 50 basis points per 6-month period, starting tomorrow, how much does Ingrid save or cost her company by making this swap?

b. If EURIBOR falls at the rate of 25 basis points per 6-month period, starting tomorrow, how much does Ingrid save or cost her company by making this swap?