LaFarge Swaps Euros for Pounds.LaFarge, a major French multinational, has signed a number of new international sales agreements which will result in it receiving payments in British pounds for at least four years. It has decided to use some of those cash inflows in pounds to service debt obligations. It wishes to enter into a four-year cross-currency swap to pay British pounds and receive euros. The notional principal of the swap is

11

million, and the current spot rate is

0.7906=1.00.

a. Use the swap rates presented in Exhibit 8.13,

LOADING...

, to lay out the contractual cash flows for all four years for the cross-currency swap.b. Unfortunately, one year later LaFarge's business contracts have been canceled as a result of the Brexit vote (the force majeure clauses allow contract cancellation). The company decides to unwind its swap agreement with three years remaining on the swap. The spot exchange rate has changed, it is now

0.8314=1.00.

Euro interest rates have risen dramatically, and a two-year rate is 1.20%, a three-year rate

1.42%.

British pound interest rates have risen on a small amount, the two-year rate now 1.44% and the three-year rate now

1.49%.

What is the cost of unwinding the swap after one year has passed (with three years remaining) for LaFarge?

Question content area bottom

Part 1

a. Use the swap rates presented in Exhibit 8.12,

LOADING...

, to lay out the contractual cash flows for all four years for the cross-currency swap.

Part 2

In the first year of the swap, LaFarge will receive

enter your response here.

(Round to the nearest euro.)

Part 3

In the second year of the swap, LaFarge will receive

enter your response here.

(Round to the nearest euro.)

Part 4

In the third year of the swap, LaFarge will receive

enter your response here.

(Round to the nearest euro.)

Part 5

In the fourth year of the swap, LaFarge will receive

enter your response here.

(Round to the nearest euro.)

Part 6

The notional principal in British pound is

enter your response here.

(Round to the nearest British pound.)

Part 7

In the first year of the swap, LaFarge will pay

enter your response here.

(Round to the nearest British pound.)

Part 8

In the second year of the swap, LaFarge will pay

enter your response here.

(Round to the nearest British pound.)

Part 9

In the third year of the swap, LaFarge will pay

enter your response here.

(Round to the nearest British pound.)

Part 10

In the fourth year of the swap, LaFarge will pay

enter your response here.

(Round to the nearest British pound.)

Part 11

b. The cost of unwinding the swap after one year has passed is

enter your response here.

(Round to the nearest euro.)

(Click on the following icon in order to copy its contents into a spreadsheet.) Exhibit 8.13 Interest Rate Swap Quotes Typical presentation by the Financial Times. Bid and ask spreads as of close of London business. US $ is quoted against 3-month LIBOR; Japanese yen against 6-month LIBOR; Euro and Swiss franc against 6-month LIBOR. Rates are for December 31, 2014 Data table (Click on the following icon Exhibit 8.13 Interest Rate Swap Quotes Typical presentation by the Financial Times. Bid and ask spreads as of close of London business. US $ is quoted against 3-month LIBOR; Japanese yen against 6-month LIBOR; Euro and Swiss franc against 6-month LIBOR. Rates are for December 31, 2014 (Click on the following icon in order to copy its contents into a spreadsheet.) Exhibit 8.13 Interest Rate Swap Quotes Typical presentation by the Financial Times. Bid and ask spreads as of close of London business. US $ is quoted against 3-month LIBOR; Japanese yen against 6-month LIBOR; Euro and Swiss franc against 6-month LIBOR. Rates are for December 31, 2014 Data table (Click on the following icon Exhibit 8.13 Interest Rate Swap Quotes Typical presentation by the Financial Times. Bid and ask spreads as of close of London business. US $ is quoted against 3-month LIBOR; Japanese yen against 6-month LIBOR; Euro and Swiss franc against 6-month LIBOR. Rates are for December 31, 2014