Thompson CS, a French-based manufacturer of consumer electronics goods, plans to expand its presence in the US market by building an assembly plant in South Carolina. In order to lower its exposure to exchange rate fluctuations, Thompson plans to raise funding in US dollars for the plant to match its USD revenues. The anticipated start-up costs for the US plant are $20 million; the current spot exchange rate is 1.31USD against the Euro. Thompson is also eligible for subsidized financing from the European Union in its attempts to promote exports of electronic components from France. Although Thompson's current cost of Euro-based debt is 9% p.a., the company can borrow Euros at a subsidized rate of 7.5% p.a. over the next 8 years to finance its South Carolina operations. A swap bank is willing to arrange 8-year swaps between US dollars and Euros, at interest rates of 7.75% p.a. on USD and 9% p.a. on Euros.

(a) Suggest how Thompson can use a swap to achieve its objective of reducing currency risk while still obtaining the financial subsidy for its US plant. Outline the cash flows for the swap.

(b) Based on the swap you proposed, what is the all-in cost of financing (in USD) for Thompson? Show your calculations .