A U$.$S$.$ MNC desires to finance a project undertaken by its Japanese subsidiary. This five$-$year

project has a cost of $1,350,000,000.$ At the current exchange rate $\frac{135}{\text{\$}},$ the parent firm

could raise $$10,000,000$ in the U$.$S$.$ capital market by issuing $5-$year bonds at $2\mathrm{.}5\%.$ An

alternative is for the U$.$S$.$ firm to raise $1,350,000,000$ in the international bond market by

issuing yen

denominated bonds for a term of five years at rate $4\%.$

A Japanese MNC of equivalent creditworthiness would like to finance a U$.$S$.$ project, in need

of $$10,000,000.$ The Japanese firm could raise $1,350,000,000$ in domestic market at a fixed

rate of $3\%$ and convert the funds to dollars. The firm could also issue dollar$-$denominated

bonds at the rate of $3\mathrm{.}5\%.$

a$.$ Develop a currency swap that benefits both firms.

b$.$ Analyze the cash flows of the U$.$S$.$ firm and the Japanese firm in this swap, and

calculate the net cost of borrowing and the savings for each firm.

c$.$ What is the contractual exchange rate on each settlement date prior to the debt

retirement? What is the contractual exchange rate at the debt maturity date?