3. Omega is a U.S.-based automotive parts supplier. With annual sales of over $26 billion, the company has expanded its markets far beyond the traditional automobile manufacturers in the pursuit of a more diversified sales base. As part of the general diversification effort, the company wishes to diversify the currency of denomination of its debt portfolio as well. Assume Omega enters into a $50 million 7-year cross currency interest rate swap to do just that pay euro and receive dollars. Current swap and exchange rates are as follow:

a. Calculate all principal and interest payments in both currencies for the life of the swap.

b.Assume that three years later Omega decides to unwind the swap agreement. If 4-year fixed rates of interest in euros have now risen to 5.35% and 4-year fixed rate dollars have fallen to 4.40%, and the current spot exchange rate of $1.0460/, what is the net present value of the swap agreement? Who pays whom what amount?

Swap Rates Assumptions Values 7-year bid 7-year ask Notional principal $50,000,000 US dollar 5.86% 5.89% Spot exchange rate, $/ 1.1225 Euros 4.01% 4.05%