You are an analyst in the treasury department of the Tropical Bank (TB). One of your corporate customers is interested in a US$200 million loan for two years. Your bank decides to fund the loan from a yen loan. Your bank agrees to borrow 26 billion at an interest rate of 1.5 percent, paid semiannually, for a period of two years. It then enters into a two-year yen/dollar swap with Citibank on a notional principal amount of $200 million (26 billion at the current spot rate). Every six months, TB pays Citibank U.S. dollar 6 M LIBOR, while Citibank makes payments to TB of 2.3 percent annually in yen. At maturity, Citibank and TB reverse the notional principals.

a. Assume that LIBOR6 (annualized) and the /$ exchange rate evolve as follows. Calculate the net dollar amount that TB pays to Citibank("-") or receives from Citibank ("+") each six-month period. (8 marks)

Time (months)	LIBOR6	/$ (spot)	Net $ receipt (+)/payment (-)
t	5.7%	128
t+6	5.4%	125
t+12	5.3%	127
t+18	5.9%	134
t+24	5.8%	125

b. What is the all-in dollar cost of TB's loan? (4 marks)

c. Does it make sense for TB to hedge its receipt of yen from Citibank? Explain.