A Small German Bank Has the Following Portfolio of Loans

Essay

A small German bank has the following portfolio of loans in U.S. dollars, valued at market value:
$\begin{array}{c}\begin{array}{|l|}\hline\text { Assets}\\\hline\text { \$ 50 million of a five-year FRN at}\\ \text { LIBOR plus 0.5 \% }\\\hline\end{array}\begin{array}{l|}\hline\text {Liabilities}\\\hline\text {\$ 10 million of a five-year loan at a fixed}\\\text { rate of 9 \%}\\\hline\end{array}\end{array}$
The German bank fears a long-term depreciation of the U.S. dollar relative to the euro and believes in stable U.S. interest rates.
a. What is its currency exposure?
b. What type of swap arrangements should it contract?
c. What should the principal of the swaps be?