A US company has a liability of 8 million in fixed-rate bonds outstanding at 6% per annum. A German company has a $10 million in fixed-rate bonds outstanding at 5% per annum. The exchange rate is $1.25/ Required: (a) Please provide details on the interest rates and currencies that the US company, German company and the swap dealer pays and receives under the swap contract that satisfies the following The same swap dealer is involved in this currency swap with the US company and the German company The US company's net borrowing cost is 5% p.a. on $ and the German company's net borrowing co The swap dealer pays and receives $ at 5% pa. All rates quoted above are with annual compounding . st is 6.1% pa. on . (6 marks) (b) Suppose the US company had entered into a 5-year currency swap with the swap dealer regarding the swap mentioned in part (a) above two years ago. The principal amounts were $10 million and 8 million. Suppose that the US company declares bankruptcy today just before the exchange of payment, when the exchange rate is $1.15/. What is the cost of default to the swap dealer in US dollars? Assume that, the continuously compounded risk free interest rate today is 4% per annum in US dollars and 3% per annum in euros for all maturities. Assume that the theoretical forward exchange rates can be realized. Hint: In the event of default, the swap dealer will not receive cashflows from the US company nor pay cashflows to the US company. The cost of default to the dealer is the value of the swap to the swap dealer if the US company had not defaulted. A US company has a liability of 8 million in fixed-rate bonds outstanding at 6% per annum. A German company has a $10 million in fixed-rate bonds outstanding at 5% per annum. The exchange rate is $1.25/ Required: (a) Please provide details on the interest rates and currencies that the US company, German company and the swap dealer pays and receives under the swap contract that satisfies the following The same swap dealer is involved in this currency swap with the US company and the German company The US company's net borrowing cost is 5% p.a. on $ and the German company's net borrowing co The swap dealer pays and receives $ at 5% pa. All rates quoted above are with annual compounding . st is 6.1% pa. on . (6 marks) (b) Suppose the US company had entered into a 5-year currency swap with the swap dealer regarding the swap mentioned in part (a) above two years ago. The principal amounts were $10 million and 8 million. Suppose that the US company declares bankruptcy today just before the exchange of payment, when the exchange rate is $1.15/. What is the cost of default to the swap dealer in US dollars? Assume that, the continuously compounded risk free interest rate today is 4% per annum in US dollars and 3% per annum in euros for all maturities. Assume that the theoretical forward exchange rates can be realized. Hint: In the event of default, the swap dealer will not receive cashflows from the US company nor pay cashflows to the US company. The cost of default to the dealer is the value of the swap to the swap dealer if the US company had not defaulted
