A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates €25,000,000 a year, received in equivalent semiannual installments of €12,500,000. The British company wishes to convert the euro cash flows to pounds twice a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert the euros to pounds. The current exchange rate is €1.9 per pound. The fixed rate on a plain vanilla currency swap in pounds is 8.0 percent per year, and the fixed rate on a plain vanilla currency swap in euros is 7.0 percent per year. Note: For all requirements, round the final answers to nearest whole dollar. Required: Determine the notional principals in euros and pounds for a swap with semiannual payments that will help achieve the objective. Determine the semiannual cash flows from this swap.
A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates €25,000,000 a year, received in equivalent semiannual installments of €12,500,000. The British company wishes to convert the euro cash flows to pounds twice a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert the euros to pounds. The current exchange rate is €1.9 per pound. The fixed rate on a plain vanilla currency swap in pounds is 8.0 percent per year, and the fixed rate on a plain vanilla currency swap in euros is 7.0 percent per year. Note: For all requirements, round the final answers to nearest whole dollar. Required: Determine the notional principals in euros and pounds for a swap with semiannual payments that will help achieve the objective. Determine the semiannual cash flows from this swap.
ChapterP2: Part 2: Exchange Rate Behavior
Section: Chapter Questions
Problem 1Q
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Question
A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates €25,000,000 a year, received in equivalent semiannual installments of €12,500,000. The British company wishes to convert the euro cash flows to pounds twice a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert the euros to pounds. The current exchange rate is €1.9 per pound. The fixed rate on a plain vanilla currency swap in pounds is 8.0 percent per year, and the fixed rate on a plain vanilla currency swap in euros is 7.0 percent per year.
Note: For all requirements, round the final answers to nearest whole dollar.
Required:
- Determine the notional principals in euros and pounds for a swap with semiannual payments that will help achieve the objective.
- Determine the semiannual cash flows from this swap.
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