1. Ericsson, a Swedish telecom equipment and services multinational, is looking to hedge some of its Chinese Yuan (CNY) exposure by borrowing in CNY. At the same time, Huawei, a Chinese telecom equipment and services multinational is seeking to finance some investments in Sweden and wants to borrow in Swedish Krona (SEK) to hedge its SEK exposure. Both want the equivalent of $500 million in fixed rate financing for 5 years.

Ericsson can issue SEK-denominated debt in the Swedish debt market at a coupon rate of 4.5% and CNY-denominated debt in the Chinese debt market at a coupon rate of 5.8%. Huawei can issue CNY-denominated debt in the Chinese debt market at a coupon rate of 5.2% and SEK-denominated debt in the Swedish debt market at a coupon rate of 5%.

Current spot rates in the currency markets are US $0.15/SEK and US $0.16/CNY. Ignoring any transaction cost or fee, structure a currency swap agreement that would enable both firms to reduce their borrowing costs, versus what they would otherwise be, while hedging their currency exposures.

1. What is the current spot cross exchange rate (SEK/CNY)?
2. What are the initial principal amounts to be exchanged at year 0?
3. What are the annual payments to be exchanged each year, from year 1 through year 5?
4. What is the implied cross exchange rate (SEK/CNY) based on these annual payments? Is this implied cross rate at a discount or premium to the current spot cross rate computed in part a? Why?
5. What is the total savings (in interest rate & dollar terms) in borrowing costs available from using the currency swap?