5. A company based in the United Kingdom has a German subsidiary. The subsidiary generates 15,000,000 a

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5. A company based in the United Kingdom has a German subsidiary. The subsidiary generates €15,000,000 a year, received in equivalent semiannual installments of €7,500,000.

The British company wishes to convert the euro cash flows to pounds twice a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert the euros to pounds. The current exchange rate is €1.5/£. The fixed rate on a plain vanilla currency swap in pounds is 7.5% per year, and the fixed rate on a plain vanilla currency swap in euros is 6.5% per year.

A. Determine the notional principals in euros and pounds for a swap with semiannual payments that will help achieve the objective.

B. Determine the semiannual cash flows from this swap.

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Derivatives

ISBN: 9781119850571

1st Edition

Authors: CFA Institute

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