Suppose That the Swap That You Proposed in Question 2

question 45

Essay

Suppose that the swap that you proposed in question 2 is now 4 years old (i.e.there is exactly one year to go on the swap).If the spot exchange rate prevailing in year 4 is $1.8778 = €1 and the 1-year forward exchange rate prevailing in year 4 is $1.95 = €1,what is the value of the swap to the party paying dollars? If the swap were initiated today the correct rates would be as shown: Consider the situation of firm A and firm B.The current exchange rate is $1.50/€.Firm A is a U.S.MNC and wants to borrow €40 million for 2 years.Firm B is a French MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown; both firms have AAA credit ratings.

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Definitions:

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The inability to fulfill any condition or duty stipulated in a contract, agreement, or obligation due to the absence of a valid legal justification.

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