Exam 14: Interest Rate and Currency Swaps

Consider the situation of firm A and firm B.The current exchange rate is $1.50/€.Firm A is a U.S.MNC and wants to borrow €40 million for 2 years.Firm B is a French MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown; both firms have AAA credit ratings. \ A \ 7\% 6\% B \8 \% 5\% Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 7 percent USD loan into a 2-year euro denominated loan.

Suppose the quote for a five-year swap with semiannual payments is 8.50-8.60 percent.This means

Amortizing currency swaps

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings. \ £ A \ 6\% £5\% B \7 \% £4\% The IRP 1-year and 2-year forward exchange rates are $F _ { 1 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) }$ = $\frac { \$ 2.0385 } { £ 1.00 }$ $F _ { 2 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } }$ = $\frac { \$ 2.0777 } { £ 1.00 }$ USD pounds Bid Ask Bid Ask 6\% 6.1\% 4\% 4.1\% Devise a direct swap for A and B that has no swap bank.Show their external borrowing.Answer the problem in the template provided

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings. \ £ A \ 6\% £5\% B \7 \% £4\% Devise a direct swap for A and B that has no swap bank.Show their external borrowing.

Pricing a currency swap after inception involves

Consider the situation of firm A and firm B.The current exchange rate is $1.50/€.Firm A is a U.S.MNC and wants to borrow €40 million for 2 years.Firm B is a French MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown; both firms have AAA credit ratings. \ A \ 7\% 6\% B \8 \% 5\% Explain how firm B could use the forward exchange markets to redenominate a 2-year €40m 5 percent euro loan into a 2-year USD-denominated loan.

Consider the situation of firm A and firm B.The current exchange rate is $1.50/€.Firm A is a U.S.MNC and wants to borrow €40 million for 2 years.Firm B is a French MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown; both firms have AAA credit ratings. \ A \ 7\% 6\% B \8 \% 5\% If firm A could use the forward exchange markets to redenominate a 2-year $60m 7 percent USD loan into a 2-year euro denominated loan,what would be the interest rate?

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings. \ £ A \ 6\% £5\% B \7 \% £4\% Explain how firm A could use the forward exchange markets to redenominate a 2-year $60m 6 percent USD loan into a 2-year pound denominated loan.

In an efficient market without barriers to capital flows,the cost-savings argument of the QSD is difficult to accept,because

When an interest-only swap is established on an amortizing basis,

The primary reasons for a counterparty to use a currency swap are

A major risk faced by a swap dealer is credit risk.This is

Come up with a swap (principal + interest)for two parties A and B who have the following borrowing opportunities. \ \ LIBOR\% \ 8\% \ +1/2\% \8 .20\% The current exchange rate is $1.60 = €1.00.Company "A" wishes to borrow $1,000,000 for 5 years and "B" wants to borrow €625,000 for 5 years.You are a swap dealer.Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B.Firms A and B are more concerned with what currency that they borrow in than whether the debt is fixed or floating.

Swaps are said to offer market completeness.

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings. \ £ A \ 6\% £5\% B \7 \% £4\% If firm B could use the forward exchange markets to redenominate a 2-year £30m 4 percent pound sterling loan into a 2-year USD-denominated loan,what would be the interest rate?

A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has agreed to one leg of the swap but company Y is "playing hard to get."

Company X wants to borrow $10,000,000 for 5 years; company Y wants to borrow £5,000,000 for 5 years.The exchange rate is $2 = £1 and is not expected to change over the next 5 years.Their external borrowing opportunities are shown here: \Bortowing E Borrowing Cost Cost Compary X \ 10\% £10.5\% Compary Y \ 12\% £13\% A swap bank proposes the following interest only swap: X will pay the swap bank annual payments on $10,000,000 with the coupon rate of 9.80 percent; in exchange the swap bank will pay to company X interest payments on £5,000,000 at a fixed rate of 10.5 percent.Y will pay the swap bank interest payments on £5,000,000 at a fixed rate of 12.80 percent and the swap bank will pay Y annual payments on $10,000,000 with the coupon rate of 12 percent. What is the value of this swap to the swap bank?

Compute the payments due in the first year on a three-year amortizing swap from company B to company A.Company A and company B both want to borrow £1,000,000 for three years.A wants to borrow floating and B wants to borrow fixed.A and B agree to split the QSD. Fixed-Rate Borrowirg Floatirig-Rate Bort owirig Cost Cost Compary A 10\% LIBOR Compary B 12\% LIBOR+1.5\%

Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings. \ £ A \ 6\% £5\% B \7 \% £4\% The IRP 1-year and 2-year forward exchange rates are $F _ { 1 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) } { £ 1.00 \times ( 1.04 ) }$ = $\frac { \$ 2.0385 } { £ 1.00 }$ $F _ { 2 }$ ($ ∣ £)= $\frac { \$ 2.00 \times ( 1.06 ) ^ { 2 } } { £ 1.00 \times ( 1.04 ) ^ { 2 } }$ = $\frac { \$ 2.0777 } { £ 1.00 }$ USD pounds Bid Ask Bid Ask 6\% 6.1\% 4\% 4.1\% Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4 percent-pound sterling loan into a 2-year USD-denominated loan.