Question 4 ervcb annual payment of interest and the principal paid at the end of the third year. The loan is priced at US dollar LIBOR + 1.50%. Assume that one year LIBOR is 2.5% LIBOR is reset every year XYZ is worried that the US interest rates may increase in the near future and hence would like to setup an interest rate swap a floating rate. The loan will be XYZ corporation has agreed to borrow Uss10mn at where XYZ swap dealer will pay fixed rate of 5.50% per year and will receive LIBOR from the (0 Show through a diagram, how this swap will work. 3 marks) (ii) After raising the $10 million, XYZ decides that it would prefer to make its debt service payments in Swiss Franc. This is because XYZ has signed a new 3-year contract with a Swiss buyer who will pay a stream of cash flows in Swiss Franc. XYZ would like to enter into a three-year pay Swiss Franc and receive Us dollars currency swap. Both interest rates are fixed. XYZ will pay 2.01% (ask rate) fixed Swiss Franc interest and receive 5.56% (bid rate) fixed USdollars. The current spot rate is Swiss Franc 1.0850 to 1 USS. Show, the cash flows receipts and payments for a nominal value of loan of US$10m. 8 marks (ii) Assume that the three-year contract with the Swiss buyer is terminated after one year and therefore XYZ would no longer want to pay cash flows in Swiss Francs and hence would like to unwind the currency swap. Assume that two year fixed US$ rate rate is 3.5%. The Swiss franc is now is 6.75% and two year r fixed Swiss Francs S trading at 1.0535 to 1 USS. Show how much XYZ would need to pay to the swap 3 dealer to unwind the swap. 9 marks] ND OF QUESTION 4 Question 4 ervcb annual payment of interest and the principal paid at the end of the third year. The loan is priced at US dollar LIBOR + 1.50%. Assume that one year LIBOR is 2.5% LIBOR is reset every year XYZ is worried that the US interest rates may increase in the near future and hence would like to setup an interest rate swap a floating rate. The loan will be XYZ corporation has agreed to borrow Uss10mn at where XYZ swap dealer will pay fixed rate of 5.50% per year and will receive LIBOR from the (0 Show through a diagram, how this swap will work. 3 marks) (ii) After raising the $10 million, XYZ decides that it would prefer to make its debt service payments in Swiss Franc. This is because XYZ has signed a new 3-year contract with a Swiss buyer who will pay a stream of cash flows in Swiss Franc. XYZ would like to enter into a three-year pay Swiss Franc and receive Us dollars currency swap. Both interest rates are fixed. XYZ will pay 2.01% (ask rate) fixed Swiss Franc interest and receive 5.56% (bid rate) fixed USdollars. The current spot rate is Swiss Franc 1.0850 to 1 USS. Show, the cash flows receipts and payments for a nominal value of loan of US$10m. 8 marks (ii) Assume that the three-year contract with the Swiss buyer is terminated after one year and therefore XYZ would no longer want to pay cash flows in Swiss Francs and hence would like to unwind the currency swap. Assume that two year fixed US$ rate rate is 3.5%. The Swiss franc is now is 6.75% and two year r fixed Swiss Francs S trading at 1.0535 to 1 USS. Show how much XYZ would need to pay to the swap 3 dealer to unwind the swap. 9 marks] ND OF QUESTION 4
