A U.S. firm (USF) issued $5,000,000 worth of ST dollar-denominated debt a few months ago. The firm wishes to effectively transform this issue into floating-rate, -denominated debt. The firm goes to CCB and inquires about what it can do to get the desired result. The bank provides USF with the following quotes. You are the consultant to USF.

CCB quotes

U.S. dollars 5.30% bid for and 5.45% ask against 6-month dollar LIBOR (3-yr swap)

Euros 4.2% bid and 4.3% asked against 6-month euro LIBOR (3-yr swap)

U.S. dollars 5.30% bid for and 5.45% ask against 6-month euro LIBOR (3-yr swap)

Euros 4.2% bid and 4.3% asked against 6-month dollar LIBOR (3-yr swap)

Spot exchange rate = $1.50/

You inform USF that two swaps will be needed to transform their debt. Swap 1 will transform the currency, leaving USF with, effectively, -denominated debt. Swap 2 will accomplish USFs floating-rate objective. You provide them with the following two cash flow worksheets based on some hypothetical LIBOR rates over the next three years. Every number you write down has to have the appropriate currency prefix (either or $) and has to have parentheses around the number if it is a cash outflow. Also, please note that the all interest rates are in yearly form whereas the cash flows occur every six months! If there are 2 cash flows that come very close to cancelling out but do not, adjust the notional principal of swap 2 to make them cancel each other out.

SWAP 1

-LIBOR $-LIBOR USFs receipt USFs payment

Time

0 (initiation)

0.5 3.6% 4.9%

1.0 4.0% 4.8%

1.5 3.9% 5.2%

2.0 4.5% 5.7%

2.5 4.9% 6.0%

3.0 4.8% 5.9%

3.0 (maturity)

SWAP 2

-LIBOR $-LIBOR USFs receipt USFs payment

Time

0 (initiation)

0.5 3.6% 4.9%

1.0 4.0% 4.8%

1.5 3.9% 5.2%

2.0 4.5% 5.7%

2.5 4.9% 6.0%

3.0 4.8% 5.9%

3.0 (maturity)