To meet the increasing demands on high-speed communication networks, Telstra and Optus are both planning to raise capital in the international debt market for the next five years. Telstra wants to borrow at a fixed rate in US dollars and Optus wants to borrow at a fixed rate in Australian dollars.

Their current fixed rate borrowing costs are below:

Company	Telstra	Optus
USD	3.20%	3.50%
AUD	3.00%	4.00%
Desired amount	USD 100m	AUD 65m
Spot rate of USD per AUD:	USD 0.6500
ANZ quoted for the 5-year currency swap:
USD	3.5% - 3.65% against 1-year USD LIBOR
AUD	3.0% - 3.75% against 1-year USD LIBOR

1. Describe the borrowing strategies for both companies through a swap contract with the bank. Specify the possible cost savings in PERCENTAGE terms for each of them. Compute the possible gains in PERCENTAGE terms for the bank. (2 marks)

2. Discuss why all parties involved in this swap will gain from the arrangement. What would be the source of their gain? (2 marks).

3. Calculate the annual cash flows for Telstra for the entire swap duration. Explain why the swap can be considered as a package of forward transactions. (3 marks)

4. Assume that at the end of the second year (immediately after the second swap payment), the spot price for the AUD moved to USD 0.70; one-year interest rates changed to 3.25% p.a. for AUD and 2.55% p.a. for USD; and interest rates are constant across all maturities. What is the value of the swap contract for Optus in USD? (3 marks)