Question 2 (07 Marks) (A) ABN Company has issued floating-rate notes with a maturity of one-year for a total value of AUD 50 million and the interest rate is BBSW plus 125 basis points. ABN Company now believes that interest rates will rise and wishes to protect itself by entering an interest rate swap. A dealer provides a quote on a swap in which the company will pay a fixed rate 6.5% and receive BBSW. Interest is paid quarterly, and the current BBSW is 5%.

(i) Indicate how the ABN Company can use a swap to convert the debt to a fixed rate. (01 Mark)

(ii) What should be the interest rate for the first floating payment to be made? (01 Mark)

(iii) You are asked to design a swap by calculating overall cash payments made by ABN Company. Assume that all payments will be made based on 90/360.

(a) Calculate the interest payment under the floating rate

(b) Calculate the fixed payment under the Swap agreement

(c) Calculate the floating receipts under the Swap agreement

(d) Calculate the overall cash payments made by the ABN company under the Swap agreement

(B) Suppose the current exchange rate between Germany and Japan is 0.04/ . The eurodenominated annual continuously compounded risk-free rate is 4% and the yen-denominated annual continuously compounded risk-free rate is 1%. What are the 6-month euro/yen and yen/euro forward prices?