Question
Omega is a U.S.-based automotive parts supplier. With annual sales of over $26 billion, the company has expanded its markets far beyond the traditional automobile
Omega is a U.S.-based automotive parts supplier. With annual sales of over $26 billion, the company has expanded its markets far beyond the traditional automobile manufacturers in the pursuit of a more diversified sales base. As part of the general diversification effort, the company wishes to diversify the currency of denomination of its debt portfolio as well. Assume Omega enters into a $50 million 7-year cross currency interest rate swap to do just that -pay euro and receive dollars. Current swap and exchange rates are as follow: Swap Rates 7-year ask 7-year bid Assumptions Values Notional principal $50,000,000 US dollar 5.86% 5.89% 4.01% Spot exchange rate, S/ 1.1225 Euros 4.05% a. Calculate all principal and interest payments in both currencies for the life of the swap. b.Assume that three years later Omega decides to unwind the swap agreement. If 4-year fixed rates of interest in euros have now risen to 5.35% and 4-year fixed rate dollars have fallen to 4.40%, and the current spot exchange rate of $1.0460/, what is the net present value of the swap agreement? Who pays whom what amount?
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