Company X wishes to borrow 25 million U.S. dollars (USD) at a fixed rate of interest. Company Y wishes to borrow 20 million euros at a fixed rate of interest. They have been quoted the following rates per annum (adjusted for differential tax effects):

	Euros	USD
Company X	8.1%	7.2%
Company Y	7.8%	6.5%

(a) Design a swap that will net a bank, acting as intermediary, 10 basis points per annum and that will produce a gain of also 15 basis points per annum for each of the two companies. Assume that the current exchange rate is 1.25 USD per euro and that the bank bears the exchange risk. Describe how your designed currency swap operates. (15%) (b) How can the bank avoid foreign exchange risk? Suppose the bank is a U.S. company. (10%)