7. You enter into a 3-year fixed-for-fixed currency swap, such that the cash-flow stream you are paying is in U.S. dollars and the cash-flow stream you are receiving is in euros. The swap contract is based on a notional principal of $1 million. The contract is an at-market swap, the swap rates are 3.6% for dollars and 4.5% for euros, and the spot exchange rate is 1.25 $/ at origination?

a. What will be your cash flows in each of the next three years? (Assume the notional principal is exchanged in three years as well as annual payments)

b. How much is the time-1 difference check (i.e., cash settlement) if the spot exchange rate at that time is 1.20 $/?

c. Immediately after the second annual payment exchange, you want to terminate the contract. At that time, 1-year interest rates are 4.15% for dollars and 5.68% for euros, and the exchange rate is 1.15 $/. What should you receive (or pay) upon termination?