Background:

a company need to borrow $500m or its equivalent in any currency that the company decided to borrow in. The amount would be needed from January 2004-2006. they forecast that interest rates were likely to increase over the next three years.

They want to borrow in Yen because the rate of Yen was lower than the Euro but will have higher exposure to exchange rate risk if borrowing in the Yen as they didn't have company/operations (revenues) in Japan and Yen had appreciated for the last 6 months.

if they borrow in the Japanese Yen what are the possible risks? How can they use a currency swap to manage this risk?

please answer this completely.

Thank you

Exhibit 3: Historical Exchange Rate for the USD/JPY Exchange Rate YEAR USD/JPY Exchange Rate Jul-03 0.008298 Aug-03 0.008555 Sep-03 0.008970 Oct-03 0.009101 Nov-03 0.009124 Dec-03 0.009319 Source: Extracted by authors from Global Financial Database