Question
A U.S. company has a liability of 15 million in fixed-rate bonds outstanding at 6%. A German company has a $15 million FRN outstanding at
A U.S. company has a liability of 15 million in fixed-rate bonds outstanding at 6%. A German company has a $15 million FRN outstanding at LIBOR. The exchange rate is $1.5/. The U.S. company enters into a plain vanilla currency swap with the swap dealer in which it pays LIBOR on $30 million and receives the swap rate of 6.0% on 15 million. The German company also enters into a plain vanilla currency swap with the same dealer, in which it pays a swap rate of 6.1% on 15 million and receives LIBOR on $30 million. One-year LIBOR is currently 5.2%. Calculate each party's net borrowing cost, the principal cash flows at the initiation and maturity of the contract, and first-year cash flows (assume annual settlement).
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