Question
Suppose that Tesla Company wants to build an auto plant in Europe and VW Corporation wants to do the same in the United States. To
Suppose that Tesla Company wants to build an auto plant in Europe and VW Corporation wants to do the same in the United States. To open a factory, you need local currency. Often a manufacturer can more easily raise cash at home because it has relationships with local banks. Tesla and VW both plan to do this. Seeing a large spread between foreign exchange buying and selling rates, they decide to do the currency conversion via a currency swap. This is a generic fixed-for-fixed currency swap that involves regular exchange of fixed payments over the swaps life. The automakers enter into a swap with a three-year term on a principal of $200 million. The spot exchange rate is $2 for 1.66. The automakers exchange principals today. One pays $200 million and the other pays in Euro equivalent to $200 million. Assuming annual payments, Tesla pays VW 4 percent on the principal in Euro (you need to find the amount) and VW pays Tesla 6 percent on $200 million at the end of each year for three years. The companies are basically exchanging their borrowings. The swap ends after three yearly payments, and the principals are handed back. Please list the cash flows for both Tesla and VW from time 0 to the end of year 3. Specifically, at each time, which company pays dollars, which pays Euro, and how much.
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