FIN 441 Assignment 7 1. A US company needs to borrow 50 million British Pound (GBP) for one year for its British subsidiary. The company has decided to issue US-denominated bonds in an amount equivalent to GBP 50 million. Then the company enters into a one-year currency swap with a British company with quarterly reset (30/360-day count) and the exchange of notional amounts at initiation and at maturity. At the swap's initiation, the US/GBP exchange rate is $1.22 and interest rates are 5 and 7 percent in the US and Great Britain respectively. a. Calculate the quarterly swap payments and indicate who pays whom and how much. b. Suppose at the maturity of the swap, the GBP has appreciated by 15 percent against the dollar. How much the return of the notional will cost each party in the swap? Which party is better off here and benefiting from the currency movement? 2. Suppose we entered a receive-equity index and pay-fixed swap. It is quarterly reset, 30/360- day count, 10,000,000 notional amount, pay-fixed (2.6% annually. If the equity index return was 4.0% for the quarter (not annualized), what is the equity swap cash flow? Who pays whom? What about if the index return is -4%?

1. A US company needs to borrow 50 million British Pound (GBP) for one year for its British subsidiary. The company has decided to issue US-denominated bonds in an amount equivalent to GBP 50 million. Then the company enters into a one-year currency swap with a British company with quarterly reset (30/360-day count) and the exchange of notional amounts at initiation and at maturity. At the swap's initiation, the US/GBP exchange rate is $1.22 and interest rates are 5 and 7 percent in the US and Great Britain respectively. a. Calculate the quarterly swap payments and indicate who pays whom and how much. b. Suppose at the maturity of the swap, the GBP has appreciated by 15 percent against the dollar. How much the return of the notional will cost each party in the swap? Which party is better off here and benefiting from the currency movement? 2. Suppose we entered a receive-equity index and pay-fixed swap. It is quarterly reset, 30/360 day count, 10,000,000 notional amount, pay-fixed ( 2.6% annually. If the equity index return was 4.0% for the quarter (not annualized), what is the equity swap cash flow? Who pays whom? What about if the index return is 4%