Q5) The effective annual euro-denominated interest rate is 1.5% p.a. and the dollar-denominated rate is 3% p.a.

The spot exchange rate is $0.85/.

A dollar-based company has a 3-year 1.5% p.a. (annually compounded) euro-denominated bond with 100 par value and 100 price. They want to guarantee the dollar value of the payments.

Question: As an alternative to hedging each euro-denominated payment with a forward contract, the firm can enter into a 3-year currency swap, which entails to receive euros 1.5% p.a. (annually compounded) on 100 bond and pay dollars 3% p.a. (annually compounded) on a $85 bond). Complete the table and calculate the value of the swap to the market maker, who acts as the counterparty to the firm.

Cash Flows for the Market-Maker
Year	Forward Exchange Rate	Dollar CFs	Euro CFs in Dollars	Net CFs In Dollars	PV Factor	PV of Net Dollar CFs
1	0.8626
2	0.8753
3	0.8882

NOTE: Please provide detailed workings / calculations.