General Electric Co (GE) is scheduled to deliver GE aircraft engines to Airbus for the A380s at the end of each year for the next five years, starting in 2014. GE expects to receive €45,000,000 from Airbus on December 31 of each year for five years, starting in 2014. GE wants to enter into a fixed-for-fixed currency swap agreement with you a (a swap bank) in order to hedge the currency risk associated with these euro receivables by locking in an exchange rate at which it can convert the expected annual euro receivables to dollars.

The current spot exchange rate is $1.37/€. The fixed rate on a currency swap in euros is 4.5% per year and the fixed rate on a currency swap in dollars is 2.5%.

a. Determine what the notional principal in euros and dollars should be for the swap to achieve its objective.

b. Determine the annual cash flow payments between GE and you (bank).

c. Determine the implied exchange rate that GE would lock in if it enters into the swap agreement.

d. How does this implied exchange rate compare to the current spot exchange rate? Explain the difference.