British Airways (BA) enters into a 4-year currency swap on a notional principal of 100,000,000. BA wants to swap out of pound debt and into dollar debt. BA will receive (interest on) pound sterling and pay (interest on) US dollars. All interest payments are annual, and the swap curve is flat. The spot rate at the time of the swap agreement is $1.30 per . The swap dealer quotes the following rates:

Swap Rates:

10- year bid - US dollar: 2.70% Pounds Sterling: 1.20%

10-year ask - US dollar: 2.80% Pounds Sterling 1.30%

a. Which are the appropriate Bid and Ask rates in the table above.

b. Calculate all cash flows paid and received by British Airways (BA) indicating the currency.

c. Why might BA enter into such a currency swap. Circle one of the following:

-BA can borrow more cheaply in the pound sterling but earns US dollar revenues

-BA can borrow more cheaply in the US dollar but earns pound sterling revenues