Question
6. A U.S. company has a liability of 10 million in fixed rate bonds outstanding at 6%. A Germany company has a $15 million FRN
6. A U.S. company has a liability of 10 million in fixed rate bonds outstanding at 6%. A Germany company has a $15 million FRN outstanding at LIBOR. The exchange rate is $1.5/. The US Company enters into a plain vanilla currency swap with the swap dealer in which it pays LIBOR on $15 million and receives the swap rate of 6.0% on 10 million. The Germany also enters into a plain vanilla currency swap with the same dealer, in which it pays a swap rate of 6.1% on 10 million and receives LIBOR on $15 million. One year LIBOR is currently 5.2%. Calculate each partys net borrowing cost, the principal cash flows at the initiation and maturity of the contract, and the first year cash flows (assume annual settlement). (20 marks)
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