Question
Ford (U.S. company) borrows $15 million in the U.S. capital market at the domestic interest rate of 10 percent per year and SONY (Japanese company)
Ford (U.S. company) borrows $15 million in the U.S. capital market at the domestic interest rate of 10 percent per year and SONY (Japanese company) borrows1,650 million Japanese Yen in the Japanese credit market at the foreign interest rate of 6 percent per year. Each party then swaps the principal amount. The principal amounts are equivalent because the spot exchange rate is 110 Japanese Yen/1$. In this way, Ford has now borrowed Yen, and SONY has borrowed dollars. This is a 5 year foreign currency swap contract and interest payments are made once a year. (You know that they will make only net payments.) Suppose the spot exchange is 115 Japanese Yen/1$ at the end of year 1. Calculate which firm owes how much (in $ amount) to the other firm.
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