Boeing is scheduled to deliver an aircraft to British Airways at the end of each year for the next five years, starting in 2013. British Airways, in turn, is scheduled to pay 50,000,000 to Boeing on December 31 of each year for five years, starting in 2013. Boeing can enter into a fixed-for-fixed currency swap agreement with a counterparty (a bank) to lock in an exchange rate at which it can convert the expected annual pound receivables to dollars. The current spot exchange rate is $1.60/. The fixed rate on a currency swap in pounds is 4.5% per year and the fixed rate on a currency swap in dollars is 3.5%.

a.Determine what the notional principal in pounds and dollars should be for the swap to achieve its objective.

b.Determine the annual cash flow payments between Boeing and the bank.

c.Determine the implied exchange rate that Boeing locks in as a result of entering into the swap agreement.

d.How does this implied exchange rate compare to the current spot exchange rate? Explain the difference?