Swap Agreement Grant, Inc., is a wellknown U.S. firm that needs to borrow 10 million British pounds to support a new business in the United Kingdom. However, it cannot obtain financing from British banks because it is not yet established within the United Kingdom. The company decides to issue dollar-denominated debt (at par value) in the United States, for which it will pay an annual coupon rate of 10 percent. It will then convert the dollar proceeds from the debt issue into British pounds at the prevailing spot rate (the prevailing spot rate is £ 1= 1.70) .$ Over each of the next three years, it plans to use the revenue in pounds from the new business in the United Kingdom to make its annual debt payment. Grant, Inc., engages in a currency swap in which it will convert pounds to dollars at an exchange rate of $1.70 per pound at the end of each of the next three years. How many dollars must it borrow initially to support the new business in the United Kingdom? How many pounds should Grant, Inc., specify in the swap agreement that it will swap over each of the next three years in exchange for dollars so that it can make its annual coupon payments to the U.S. creditors?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 18, Problem 13QA
Textbook Problem

Swap Agreement Grant, Inc., is a wellknown U.S. firm that needs to borrow 10 million British pounds to support a new business in the United Kingdom. However, it cannot obtain financing from British banks because it is not yet established within the United Kingdom. The company decides to issue dollar-denominated debt (at par value) in the United States, for which it will pay an annual coupon rate of 10 percent. It will then convert the dollar proceeds from the debt issue into British pounds at the prevailing spot rate (the prevailing spot rate is £ 1= 1.70) .$ Over each of the next three years, it plans to use the revenue in pounds from the new business in the United Kingdom to make its annual debt payment. Grant, Inc., engages in a currency swap in which it will convert pounds to dollars at an exchange rate of $1.70 per pound at the end of each of the next three years. How many dollars must it borrow initially to support the new business in the United Kingdom? How many pounds should Grant, Inc., specify in the swap agreement that it will swap over each of the next three years in exchange for dollars so that it can make its annual coupon payments to the U.S. creditors?

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