Question
Two companies Fook Ltd (Chinese) and Picardie Entreprise (French) have been quoted the following fixed interest rates for loans in the corresponding currencies. The quoted
Two companies Fook Ltd (Chinese) and Picardie Entreprise (French) have been quoted the following fixed interest rates for loans in the corresponding currencies. The quoted rates have been adjusted to reflect the differential impact of taxes. Suppose that Fook Ltd wants to borrow 160000 Euro and Picardie Entreprise 1.2 Million Chinese Yuan(CNY) at fixed interest rates over a 2 years period. The spot rate is CNY 7.5/ EURO. COMPANY Chinese Yuan Euro Fook Ltd 5.0% 9.6% Picardie Entreprise 6.5% 10.0% (i) Justify the choice for a currency swap for the 2 companies. (3 marks) (ii) Design a currency swap such that The Bank acting as intermediary earns a commission of 0.2% per annum and Fook Ltd gains 0.1 % more than Picardie enterprise in the swap agreement. Determine the cash flows at the end of each year till maturity. (10 marks) (iii) Comment on the banks assessment of currency fluctuation. (2 marks)
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