OCP, a Canadian industrial company, has the opportunity to do a $85 million Canadian Dollar five year bond issue at 6% compounded semi-annually with a bullet repayment.

In addition, the Company has also been offered a 55 million EuroSterling 5- year bond issue (bullet repayment and semi-annual pay as well) at 4.03% p.a. (based on a single A credit rating) through their friendly investment banker that could finance the whole project.

The issuing costs are the same (Including the currency conversion) for both issues. However, OCP is concerned about assuming any currency risk (all of their revenues are in Canadian Dollars) and you indicate, as the Company Treasurer, that the issue can be done on a fully hedged basis doing a series of forwards in the currency market.

Lay out the structure, as you would explain it to management and describe the hedge providing the all-in Canadian Dollar cost (and show the comparable Canadian interest expense on a fully-hedged basis) so you can compare the two bond issues. If the Sterling issue is selected you have to convince management that there is no currency risk in doing the issue based on your structure.

As noted, you have to prepare the fully hedged cost using forwards to cover the interest and principle payments. To make this comparison of the cost, you source the Pound Sterling/Canadian Dollar forward rates from a bank source (as shown below) and describe the transaction that would occur with these values at each payment date - how much would it cost them in Canadian dollars to make each payment?Once you have calculated each interest payment and principle repayment determine the all-in cost of the bond issue in Canadian dollars for the Company.

C$/Pound forwards:

spot:$1.545

6 mo.:1.5219

12 mo:1.5009

18 mo:1.4976

24mo:1.4945

30 mo:1.4912

36 mo:1.4876

42 mo:1.4852

48 mo:1.4831

54 mo:1.4802

60 mo:1.4783

Which one do you recommend to the company?