Trimp Co$,$ a company based in the USA, wants to borrow $500$m over five years to finance an investment in the Europe. Today$$s spot exchange rate is $1300=$ $$1.$

Trimp$$s bank can arrange a currency swap with Macon co$.$ The swap would be for the principal amount of $500$m$,$ with a swap of principal immediately and in five years$$ time, with both these exchanges being at today$$s spot rate.

Trimp$$s bank would charge an annual fee of $0\mathrm{.}4\%$ in $$ for arranging the swap.

The benefit of the swap will be split equally between the two parties.

The relevant borrowing rates for each party are as follows:

Trimp Co Macon Co

USA $3\mathrm{.}6\%4\mathrm{.}5\%$

Europe LIBOR $+1\mathrm{.}5\%$ LIBOR $+0\mathrm{.}8\%$

Required: Explain how a currency swap would allow Trimp to reduce the cost for borrowing $500$m$.$