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mestion 2 Currengy Swaps Suppose the e'ective annual euro-denominated interest rate is 1.5% pa. and the dollar- denominated rate is 3% g The spot exchange rate is $0.85/. A dollar-based rm has a 3- year 1.5% p.a. (annually compounded) euro-denominated bond with a 100 par value and price of 100. The rm wishes to guarantee the dollar value of the payments. (a) Since the rm will make debt payments in euros, it buys the euro forward to eliminate currency exposure. Please complete the following table and prove that hedging does not change the value of the debt. Unhedged Euro Cash Forward Exchange Hedged Dollar Cash Flow Rate Flow - 0 8626 = _ 0.8753 _ 0.8882 = Hints. I ) At the end of each year, the f rm is liable to pay a coupon of]. 5% on 100 par value (1'. e. I 5). 2) To prove hedging does not change the value of the debt, you should demonstrate the present value of the hedged cash ows is approximately equal to the price of the bond