Currently the terms for a 4-year fixed rate currency swap between the euro (EUR) and the USD are as follows: The spot rate at which the principals are exchanged is EUR1 = USD1.19 and the annual interest rates for the swap payments are 2.08% (APR) on the USD principal and 0.076% (APR) on the EUR principal (interest is paid semiannually).

Party A enters into this swap for a notional value of EUR100M wishing to make semi-annual EUR interest payments and receives semi-annual USD interest payments. Draw a diagram for the cash inflows and outflows of this swap for Party A. Label the amounts of each cash flow for this swap.

One year into the swap (after the second semi-annual interest payment), the exchange rate has become USD1.25 per EUR, and the EUR interest rate for a 3-year swap rises to 0.25% (APR) (the USD interest rate for a 3 year swap is 2.08% (APR)). Describe the swap Party A would enter into to offset the USD cash flows on the existing swap. Draw the cash flow diagram for this swap.

What is the USD value of the original swap to Party A? Value the original swap both using the off-setting swap approach and the net PV of remaining cash flows on the original swap at the new swap interest rates and new current exchange rate.