6. Consider a 2-year currency swap between USD and EUR involving floating rates only.

The EUR benchmark is selected as 6-month Euro LIBOR, the dollar benchmark is 6-month BBA LIBOR. You also have the following information:

Notional amount 5 USD10;000;000 Exchange rate EUR=USD 5 0:84

a. Show the cash flow diagrams of this currency swap. Make sure to quantify every cash flow exactly (i.e., use a graph as well as the corresponding number).

b. Show that this currency swap is equivalent to two floating rate loans.

c. Suppose a company is trying to borrow USD10,000,000 from money markets.

The company has the following information concerning available rates on 6-month loans:

EUR LIBOR 5 5.7%, USD LIBOR 5 6.7%

EUR
USD currency swap spread: 1 year—75, 2 years—90.

Should this company borrow USD directly? Would the company benefit if it borrowed EUR first and then swapped them into USD?