Question
A company based in Thailand has a Vietnamese subsidiary. The subsidiary generates 215232 VND a year, received in equivalent four installments. The Thai company wishes
A company based in Thailand has a Vietnamese subsidiary. The subsidiary generates 215232 VND a year, received in equivalent four installments. The Thai company wishes to convert the Vietnamese Dong cash flows to Thai Baht four times a year. It plans to engage in a cross-currency swap in order to lock in the exchange rate at which it can convert the Vietnamese Dong to Thai Baht.
The current exchange rate is 803 VND/1 THB. The fixed bid and ask rates on a plain vanilla currency swap in Thai Baht is 3.0 % - 3.2 % per year, and the fixed bid and ask rates on a plain vanilla currency swap in Vietnamese Dong is 5.5 % - 5.7 % per year.
1. calculate the effective exchange rate in the format of (VND/THB 1) as a result of the cross-currency swap. Answer with 4 decimal digits.
2. If the spot rate between Vietnamese Dong and Thai Baht is 813 VND / 1 THB on date of the first installment, will the subsidiary be better or worse off using the cross-currency swap?
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