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A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates 10,000,000 a year, received annually. The British company wishes to convert
A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates 10,000,000 a year, received annually. The British company wishes to convert the euro cash flows to pounds once a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert the euros to pounds. The current exchange rate is 1.23/. The fixed rate on a plain vanilla 5- year currency swap in pounds is 1.20% per year, and the fixed rate on a plain vanilla 5-year currency swap in euros is 1.00% per year. 1. Determine the notional principals in euros and pounds for a swap with annual payments that will help achieve the objective. 2. Determine the annual cash flows from this swap, and illustrate the cash flows with a swap diagram. 3. Calculate the effective exchange rate at which the payments are swapped. A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates 10,000,000 a year, received annually. The British company wishes to convert the euro cash flows to pounds once a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert the euros to pounds. The current exchange rate is 1.23/. The fixed rate on a plain vanilla 5- year currency swap in pounds is 1.20% per year, and the fixed rate on a plain vanilla 5-year currency swap in euros is 1.00% per year. 1. Determine the notional principals in euros and pounds for a swap with annual payments that will help achieve the objective. 2. Determine the annual cash flows from this swap, and illustrate the cash flows with a swap diagram. 3. Calculate the effective exchange rate at which the payments are swapped
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