1.On-market Currency Swap

Assuming a mid-rate of 3.9% p.a. is paid on five-year GBP interest rate swaps (dealers spread is + 3 bps). Construct a five-year plain vanilla currency swap between Bill Ltd and Ben Ltd who are in the following position:

Income Liability

Bill Ltd:USD 16 millionGBP 10 million

@USD SOFR+2.5%@ 3.5% p.a.

Ben Ltd:GBP 10 millionUSD 16 million

@ 5% p.a.@ USD SOFR flat

Assume an initial exchange rate of GBP/USD = 1.6000.

Diagram all interest flows.

2.Tom Ltd has borrowed 2 million USD by issuing debentures which mature in exactly five years at a coupon rate of 6% p.a. paid semi-annually. Jerry Ltd has borrowed 2.6 million EUR for five years at the floating rate of six-month ESTR plus 1.0% p.a., with semi-annual interest payments.

Tom has income which is essentially floating rate EUR, whilst Jerry has predominantly fixed rate USD income. Accordingly, Tom and Jerry have approached you as a swap dealer and requested that you arrange for an on-market swap that will reduce both their exchange rate and interest rate risk.

The following data has been gathered:

USD/EUR spot rate:1 USD = 1.3 EUR

Five year swap mid-rate:8.0% p.a. USD against 6-month EUR ESTR flat.

4.0% p.a. EUR against 6-month EURESTR flat.

For dealer pays fixed-rate subtract 3 basis points,

for dealer receives fixed add 3 basis points.

i)Diagram the interest and income flows for a swap that would meet their requirements.

ii)If, in exactly six months time, the exchange rate was 1USD = 1.38 EUR, what would be Jerrys net interest payments (as a result of the swap and direct borrowing) on that date?