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Company A wants to borrow in Euros while company B wants to borrow in Pounds. Company A Company B GBP 5% 8% EUR 4% 6%
Company A wants to borrow in Euros while company B wants to borrow in Pounds.
Company A | Company B | |
---|---|---|
GBP | 5% | 8% |
EUR | 4% | 6% |
Set a 4 year currency swap for these companies if the gains are to be equally divided between the companies and the swap bank does not charge commission. Calculate the cash flows for a 1,000 [GBP] notional amount if the spot rate is 1.3 [EUR/GBP] and the cash to be exchanged to balance the swap if the exchange rate moves to 1.1 [EUR/GBP]. What happens to the swap bank if the EUR appreciates with respect to the GBP?
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