This question is about exchange rate, help me with step by step solutions only

Question I (25 points - Swaps) A five-year currency swap involves two AAA borrowers and has been set at current market interest rates. The swap is for U.S. $100 milion against AUD 200 milion at the current spot exchange rate of AUD/$ 2.00. The interest rates are 10% in U.S. dol ars and 7% in Australian do lars, or annua swaps of U.S.$10 milion for AUD 14 million. A year later, the interest rates have dropped to 8% in U.S. dol ars anc 6% in Australian dollars, and the exchange rate is now AUD/$ 1.9. (a) What should the market value of the swap be in the secondary market? Assume now that the swap is instead a currency-interest rate swap whereby the col ar interest is set at LIBCR. (b) What woud the market value of the currency-interest rate swap be if these conditions prevailed a year later?Question II (25 points - Offshore banking) The current exchange rate is $2/E. Cookham Industries is a large British firm that exports computer games to the United States. If the dollar depreciates relative to the pound, Cookham will increase the dollar price it charges its U.S. customers. But it cannot raise its U.S. price enough to fully offset any dollar depreciation because if it does so, it will lose customers to its U.S. competitors. Its rule of thumb is that for every $.10/f increase in the exchange rate (e.g., from $2.00/f to $2.10/f) it will increase prices by $5 (e.g., from $200 to $205 per game). The company will not lower down the product price in US Dollar if sterling pound depreciates against US Dollar from, and to below $2/E. Given this rule, it will lose only some of its U.S. sales. Suppose its forecast of annual sales in the United States as a function of the dollar price is: Quantity sold = 50,000 - 100 x price in dollars Answer the questions below. a. Plot the British pound value of Cookham's revenue from its U.S. sales as a function of the exchange rate for exchange rates ranging from $1.50/f to $3.00/E. What is its exchange rate exposure? b. Suppose each exchange rate scenario in part (a) is equally likely. What would Cookham's expected dollar revenue be? What would be its pound revenue in each scenario if it sold forward that number of U.S. dollars at a forward exchange rate of $2/E? Does this seem like an effective hedge? C. As an alternative, Cookham calculates the hedge ratio (i.e., the number of dollars it will sell forward) as [Arevenue in {] / [Aexchange rate in E/$], i.e., revenue change induced by exchange rate change Why do you think this hedge ratio perform so much better in offsetting exchange rate risk than the one you calculated in part (b)?Question III (25 points - FRA and synthetic interest rate futures) a. (15 points) A bank sells a "three against nine" $3,000,000 FRA (forward rate agreement) for a six-month period beginning three months from today and ending nine months from today. The purpose of the FRA is to cover the interest rate risk caused by the maturity mismatch from having made a three-month Eurodollar loan and having accepted a nine-month Eurodollar deposit. The agreement rate (per annum) with the buyer is 5.5 percent. There are actually 183 days in the six-month period. Assume that three months from today the settlement rate (per annum) is 4 7/8 percent. Determine how much the FRA is worth and who pays whom -- the buyer pays the seller or the seller pays the buyer. b. (10 points) Draw a schematic diagram (similar to the one below) and explain step-by-step how to construct a synthetic interest rate future that generates the same hedging effect as the FRA described in (a). Figure 11A.1 Synthetic Eurocurrency Interest Rate Pricing iFC,tosh iFC,h ,z FC B Sto Ft Ftz Currency Dimension US$ C D is.toshi to 12 Time DimensionQuestion IV (25 points - Dual-currency bonds) The yield curves in U.S. dollars and Swiss francs are as follows: U.S. Dollar % Swiss Franc % 1 year 10 6 2 years 12 These are yields for zero-coupon bonds of one- and two-year maturity. The spot exchange rate is SF/US$ = 1.5. a. (5 points) What are the implied one-year and two-year forward exchange rates? b. (10 points) You contemplate issuing a dual-currency bond. You could issue zero-coupon bonds in both currencies at the interest rate above. Instead, you wish to issue bonds of SF 150 with a coupon C in Swiss francs, paid each year for two years, and reimbursed for $100 at the end of two years. What is the interest rate c% (c = C/150) on the bond that would be consistent with the yield curve above? c. (10 points) You contemplate issuing a two-year currency option bond. The bond is issued for $100 and gives the option to receive the coupons and principal payment in either dollars or Swiss francs at a fixed exchange rate of SF/US$ = 1.5. A bank gives you quotes on the premiums for SF calls with a strike price of 1/1.5 = 0.66666 US$. The premium for a one-year call is 4 U.S. cents (per Swiss franc) and for a two-year call is 7 U.S. cents. What coupon rate should you set on your currency option bond?uestion '0\" int: a. (15 points} A swap with a maturity of ve years was contracted by Pepsi Inc. three years ago. Fapaf swapped $100 million for DH 25D million. The swap payments were annual, based on market interest rates of 5% in dollars and 4% in DM. In other words, Fapaf Inc. contracted to pay dollars and receive DM. The current spot exchange rate is 2 EMS. and the current interest rates are 5% in EM and 19% in $ [the term structures are at. i.e.. interest rates does not vary with maturity}. i. [1|] points] What is the swap payment at the end of year 3'? Does Fapaf pay or receive? ii. [5 points) What is the nal swap payment at the end of year 5? b. {111] points} A French corporation plans to invest in Thailand to develop a local subsidiary to promote its French products. The creation of this subsidiary should help boost its exports from France. The Thai baht is pegged to a basket of cunencies denominated by the U.S. dollar, so borrowing in U3. dollars would reduce the currency risk on this investment The corporation needs to bonow $211] million for ve years. A bank has proposed a ve-year dollar loan at T.?5%. The French govemment wishes to support this type of foreign investments helping French exports. A French government agency can subsidize a 1.5% improvement in French franc interest costs. In other words. the corporation can get a ve-year. FF 100 million loan at 15% instead of the current market conditions of 5%. The current spot exchange rate is 5.IIID FFt$. A bank offers to write a currency swap for a principal of $33 million. whereby the corporation would pay dollars at ?.T5% and receive franc: at 9%. What could the corporation do to get an obligation in dollars, its desired currency position. while capturing the French interest rate subsidy