AAA a US auto company wants to build a plant in UK and BBC a UK bus company wants to do built a bus plant in US. It is easier to raise money in US for AAA and in UK for BBC. They both plan to do this and seeing a large spread between foreign exchange buying and selling rates they decide to do the currency conversion via a currency swap. They enter into a swap contract with 3 year term on a principal of $200 million. Spot exchange rate is $2 per pound. AAA raises 100x2= $200 million and gives it to BBC and BBC raises 100 million pounds and gives it to AAA. AAA pays BBc 4% on 100 million pounds and BBC pays AAA 6% on $200 million at the end of each of the next 3 years. The two firms basically exchange their borrowings. The swap end after 3 years and the principals are handed back. Can you try to help us put a dollar value for us of this contract? This is the question that AAA BoD charged you with.

You will present your report to AAAs Board of Directors.