4. (25 points) At a time when the dollars per pound exchange rate was $1.40/, two companies entered a currency swap agreement with the following terms. (Some of the figures below, as well as the company names, have been changed in order to preserve the privacy of the companies (which we will call Company A and Company B) and their information).

The duration of the agreement is 6 years.

Notional principal is 50 million (or the $ equivalent which at the time was $70 million).

Company A will borrow 50 million from Company B at an interest rate of 4% per year.

Company B will borrow $70 million from Company A at an interest rate of 5% per year.

The first transfers will be at the end of the day the agreement was made.

Interest payments are made annually and the full principal amount is due at the end of the 6-year period.

(a) Upon entering the agreement (i.e. looking forward from that point in time), what are Company As scheduled cash flows through the duration of the deal? [include both the dollar cash flows and the pound cash flows from company As perspective]

(b) In hindsight, it turned out that the dollars-per-pound exchange rate increased during the duration of the deal. Suppose that the pound appreciated against the dollar in a steady pace of 2% per year (in each year for the next decade). Calculate the net dollar value of Company As payouts at the end of each year. [use a spreadsheet to make this calculation]

(c) Suppose instead that the pound appreciated against the dollar only in the first three years of the deal (by 2% in each year), and that in the second half of the deal, the pound depreciated against the dollar (by 1% per year) in each of the remaining three years. Calculate the net dollar value of Company As payouts at the end of each year. [use a spreadsheet to make this calculation]

(d) Under the assumptions of part (c), suppose Company B filed for bankruptcy approximately 4.5 years from the inception of the swap agreement. With no assets or cash, Company B was not able to pay any creditors and defaulted on all its liabilities including the remaining two payments of the swap. What is the financial damage to Company A as a result of the bankruptcy of Company B?