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Example: Dow Chemical ( US ) wants to hedge Euro exposure by borrowing in Euros. Michelin ( French ) wants dollars to finance US investments.
Example: Dow Chemical US wants to hedge Euro exposure by borrowing in Euros. Michelin French wants dollars to finance US investments. Both want $ mil equivalent at a fix rate for years. Company Borrowing rates Borrowing cheaper home currency In need of USD EUR Dow Chemical US USD EUR Michelin France EUR USD Current spot rate EURUSD Therefore they should do currency swap fixedforfixed Dow Chemical US Michelin France Borrowing $ mil by issuing bonds Swapping $ mil for mil Paying interest $m $ mil year Swapping back mil for $ mil Paying back $ mil debt Borrowing mil from the bank at Swapping mil for $ mil Paying interest m mil year Swapping back $ mil for mil Paying back mil debt Saving interest $m $ mil year Saving interest mil year Interest rate swap fixedforfloating is similar in borrowing with cheaper cost. Principals may not be swapped because unlike currency swap in need of foreign currencies this is to get lower interest rates. Company Borrowing rates Borrowing cheaper home currency Swapping for both save USD EUR Dow Chemical US LIBOR Fixed Float LIBOR Michelin France LIBOR Float LIBOR Fixed The problem. Current exchange rate is $ Dell Inc. US wants to borrow mil for years and rates are for pound vs for dollar. Virgin Airlines UK wants to borrow $ mil for years and rates are for dollar vs for pound. What swap transaction would accomplish the objectives? points How much did each party save per year if they swap the original rate? points What is the cost savings for each party per year if Dell paying to Virgin for pounds, and Virgin pays for dollars? points
Example: Dow Chemical US wants to hedge Euro exposure by borrowing in Euros. Michelin French wants dollars to finance US investments. Both want $ mil equivalent at a fix rate for years.
Company
Borrowing rates
Borrowing cheaper
home currency
In need of
USD
EUR
Dow Chemical US
USD
EUR
Michelin France
EUR
USD
Current spot rate EURUSD Therefore they should do currency swap fixedforfixed
Dow Chemical US
Michelin France
Borrowing $ mil by issuing bonds
Swapping $ mil for mil
Paying interest $m $ mil year
Swapping back mil for $ mil
Paying back $ mil debt
Borrowing mil from the bank at
Swapping mil for $ mil
Paying interest m mil year
Swapping back $ mil for mil
Paying back mil debt
Saving interest $m $ mil year
Saving interest mil year
Interest rate swap fixedforfloating is similar in borrowing with cheaper cost. Principals may not be swapped because unlike currency swap in need of foreign currencies this is to get lower interest rates.
Company
Borrowing rates
Borrowing cheaper
home currency
Swapping for
both save
USD
EUR
Dow Chemical US
LIBOR
Fixed
Float LIBOR
Michelin France
LIBOR
Float LIBOR
Fixed
The problem. Current exchange rate is $
Dell Inc. US wants to borrow mil for years and rates are for pound vs for dollar.
Virgin Airlines UK wants to borrow $ mil for years and rates are for dollar vs for pound.
What swap transaction would accomplish the objectives? points
How much did each party save per year if they swap the original rate? points
What is the cost savings for each party per year if Dell paying to Virgin for pounds, and Virgin pays for dollars? points
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