1. A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates Euro 25,000,000 a year, received in equivalent semiannual installments of Euro 12,500,000. The British company wishes to convert the euro cash flows to pounds twice a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert to euros to pounds. The current exchange rate is Euro 1.5 pound. The fixed rate on a plain vanilla currency swap in pounds is 7.5 percent per year, and the fixes rate on a plain vanilla currency swap in euros is 6.5 percent per year.

1. Determine the notional principals in euros and pounds for a swap with semiannual payment that will help achieve the objective. (4 mark)
2. Determine the semi-annual cash flows from this swap. (4mark) (b)Explain Vernons product life-cycle theory of FDI. What are the strength and weakness of the theory? (12mark)

(c ) Discuss how the cost of capital is determined in segmented versus integrated capital markets. ( 5mark)