A U.S. firm (USF) recently issued 6,000,000 worth of LT euro-denominated debt at 6.2% per year, with semiannual payments of half that amount. 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 a swap can be used to transform their debt. The swaps notional principal will need to be set so that the cash inflow from the swap will offset the cash outflow associated with the debt. You provide them with the following cash flow worksheet based on some hypothetical LIBOR rates over the next three years. Every number you write down must have the appropriate currency prefix (either or $) and must have parentheses around the number if it is a cash outflow. Also, please note that all interest rates are in yearly form whereas the cash flows occur every six months!

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)