Individual Homework-3

Individual Homework-3 - 1. SET UP A CURRENCY SWAP A swap...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1. SET UP A CURRENCY SWAP A swap bank familiar with the financing needs of the two firms could arrange a currency swap that would benefited each counterparty and would solve the double problem of borrow at a disadvantageous and long-term interest risks of each firm. Basic currency swap with and without bid-ask spread Assume that there is no bid-ask spread, the bid and ask swap rates charge by the swap bank are the same. The swap bank would instruct each parent firm to raise funds in its national capital market where they have a comparative advantage to borrow in low rates. Then the principal sums raised in the national capital markets by Centralia ($2,900,000) and the Spanish MNC (€2,180,451) would be exchanged through the swap bank at the forecasted exchange rate of $1.33/€1.00 to obtain the desired currency, €2,180,451 for Centralia and $2,900,000 for the Spanish MNC. The subsidiaries of the two firms would be expected to earn enough on the projects to meet annual dollar and euro debt service and to repay the principal in eight years. Table 14.1: CURRENCY SWAP CASH FLOW WITHOUT BID-ASK SPREAD
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

Individual Homework-3 - 1. SET UP A CURRENCY SWAP A swap...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online