Consider a $3-$year annual currency swap that takes place between a

foreign firm $($FE$)$ with FC currency units and a United States firm $($US$)$ with

dollar currency units. Firm US is the fixed$-$rate payer and Firm FE is the

floating$-$rate payer. The fixed interest rate at the initiation of the swap is $7$

percent, and $8$ percent at the end of the swap. The variable rate is $5$

percent currently; $6$ percent at the end of year $1$; $8$ percent at the end of

year $2$; and $7$ percent at the end of year $3.$ At the beginning of the swap,

USD$1\mathrm{.}0$ million is exchanged at an exchange rate of EC$2\mathrm{.}0=$ USD$1\mathrm{.}0.$ At

the end of the swap period, the exchange rate is ED$1\mathrm{.}5=$ USD$1\mathrm{.}0.$

Note: With this currency swap, end$-$of$-$period payments are based on

beginning$-$of$-$period interest rates.

a$)$ Compute and justify the currency swap at the end of year $2.$

b$)$ At the termination of the swap, calculate which of the notional

amounts Firm FE gives Firm US$.$