Husky Corp is a US firm with a subsidiary in South Africa and Zebra Corp is a South African firm with a subsidiary in the US.  Husky has AA credit rating and can borrow in the US with 7% interest for USD, and can borrow in South Africa with 11% interest for ZAR. Zebra has BBB rating and can borrow ZAR in South Africa with 12% interest and USD in the US with 9.5% interest. Spot Exchange rate is 0.8 USD for each ZAR and borrowing required is $5,000,000.

You are working for an investment bank and will offer a Swap deal to both companies which today will equally benefit both companies while managing their currency exposure.

a. Define the terms of Swap contract for each company (Interest rate, currency received/paid)

b. Define Swap Bank’s currency exposure and calculate Swap Bank’s annual profit assuming constant foreign exchange rate.