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A U.S. company has a liability of €10 million in fixed rate bonds outstanding at 6%. A Germany company has a $15 million FRN outstanding at LIBOR. The exchange rate is $1.5/€. The US Company enters into a plain vanilla currency swap with the swap dealer in which it pays LIBOR on $15 million and receives the swap rate of 6.0% on € 10 million. The Germany also enters into a plain vanilla currency swap with the same dealer, in which it pays a swap rate of 6.1% on € 10 million and receives LIBOR on $15 million. One year LIBOR is currently 5.2%. Calculate each party’s net borrowing cost, the principal cash flows at the initiation and maturity of the contract, and the first year cash flows (assume annual settlement).

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M92018766

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