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A U.S. firm currently has business value of $10m and USD-denominated net debt of $4m. Assume an FX business exposure to the euro of -1.25.
A U.S. firm currently has business value of $10m and USD-denominated net debt of $4m. Assume an FX business exposure to the euro of -1.25. (1)Determine the notional principal of a currency swap position that will eliminate the FX equity exposure to the euro. (2) Assume that the euro appreciates by 10% versus USD. Show how the equity value stays unchanged.
(3) Confirm your answer in (2) by equation
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