Datson is a US based automotive parts supplier which has annual sales of over US$26 bn. Datson has expanded its markets far beyond traditional automobile manufacturers to diversify its sales base. As part of the general diversification efforts, Datson wishes to diversify its debt portfolio as well. Datson enters into a US$50 million swap where it agrees to pay Euro cash flows and receive US Dollar cash flows using the following quotes and information:

Values Swap Rates 5- year bid 5-year ask

Notional principal 50,000,000 US $ 5.86% 5.89%

Spot exchange rate, $/ 1.16 Euros 4.01% 4.05%

(i) Show via a diagram, how this swap will work. Calculate all cash flows in both currencies over entire 5 years.

(ii) Assume that after two years, Datson decides to unwind the swap. If 3-year fixed rate in Euro has now risen to 5.05% and 3-year US$ fixed rate has fallen to

4.40%, and current spot rate is $1.12/, should Datson unwind the swap? How

much would Datson will pay or receive?