A Chinese company wants to borrow US$100 million to set up a subsidiary in the US. It can borrow US$ at 5%/yr., while it can borrow Chinese Yuan at 3%/yr. A Swap dealer based in the US can borrow US$ at 4%/yr., and can invest Chinese Yuan at 3.5%/yr.

a) Design a 2-year currency swap agreement between the Chinese company and the Swap dealer that will be beneficial to both parties. (Assume an exchange rate of 1Yuan = US$ 0.14).

b) Identify two types of risk that the Chinese company is exposed to with this agreement.