Case 1 "Circus Swap" A circus swap is a combination of an interest rate swap and a currency swap. The swap involves three counter parties: Ford Motor Company (US), Quantas Airlines (Australia) and Foster's Brewery's parent group, AB Inbev (Australia). Suppose that Ford, Quantas and Foster's have the following borrowing terms in the US and Australia: USD Fixed AUD Fixed Floating Ford 5.0% 6.5% LIBOR+10 bps Foster's 7.0% 7.25% LIBOR Quantas 6.75% 7.15% LIBOR Part 1: Currency Swap Ford needs AUD for a capital project that they will undertake in Sydney. Foster's plans on adding to an existing brewery facility in the US and so they desire USD. Since both involve capital projects they both desire fixed rate funding. a. For the currency swap, Foster's and Ford borrow fixed in their respective capital markets from outside lenders. What terms would each borrow under (Ford USD, Foster's AUD)? b. In the swap, Foster's agrees to pay Ford 5.75 fixed for USD and Ford agrees to pay Foster's 6.75 fixed for AUD. Draw a diagram to show the direction of payment and the cash flows for each party. Use the supplied Part 1 template for your diagram. C. What are the net borrowing costs for Ford and Foster's after the swap and how much did each party save? Analyze the inflows and outflows for each party to answer this part. Part 2: Interest Rate Swap d. Ford decides after this is done that they really need to alter the loan to a floating rate loan. They begin with the terms of the swap that they had with Foster's above. They then agree to an AUD/AUD fixed for floating swap with Quantas, who wants fixed rate money in the same term as Ford. e. For the fixed/floating swap, Quantas borrows in their respective capital market from their outside lender at LIBOR. Ford agrees to pay Quantas LIBOR and Quantas agrees to pay Ford 6.25% fixed for AUD. Draw a diagram and show the direction of payment and cash flows for each party. Use the supplied part 2 template for your diagram. f. What are the net borrowing costs and savings for each party after this leg of the swap? Analyze the inflows and outflows for each party to answer this. Case 1 "Circus Swap" A circus swap is a combination of an interest rate swap and a currency swap. The swap involves three counter parties: Ford Motor Company (US), Quantas Airlines (Australia) and Foster's Brewery's parent group, AB Inbev (Australia). Suppose that Ford, Quantas and Foster's have the following borrowing terms in the US and Australia: USD Fixed AUD Fixed Floating Ford 5.0% 6.5% LIBOR+10 bps Foster's 7.0% 7.25% LIBOR Quantas 6.75% 7.15% LIBOR Part 1: Currency Swap Ford needs AUD for a capital project that they will undertake in Sydney. Foster's plans on adding to an existing brewery facility in the US and so they desire USD. Since both involve capital projects they both desire fixed rate funding. a. For the currency swap, Foster's and Ford borrow fixed in their respective capital markets from outside lenders. What terms would each borrow under (Ford USD, Foster's AUD)? b. In the swap, Foster's agrees to pay Ford 5.75 fixed for USD and Ford agrees to pay Foster's 6.75 fixed for AUD. Draw a diagram to show the direction of payment and the cash flows for each party. Use the supplied Part 1 template for your diagram. C. What are the net borrowing costs for Ford and Foster's after the swap and how much did each party save? Analyze the inflows and outflows for each party to answer this part. Part 2: Interest Rate Swap d. Ford decides after this is done that they really need to alter the loan to a floating rate loan. They begin with the terms of the swap that they had with Foster's above. They then agree to an AUD/AUD fixed for floating swap with Quantas, who wants fixed rate money in the same term as Ford. e. For the fixed/floating swap, Quantas borrows in their respective capital market from their outside lender at LIBOR. Ford agrees to pay Quantas LIBOR and Quantas agrees to pay Ford 6.25% fixed for AUD. Draw a diagram and show the direction of payment and cash flows for each party. Use the supplied part 2 template for your diagram. f. What are the net borrowing costs and savings for each party after this leg of the swap? Analyze the inflows and outflows for each party to answer this