Problem 8: Company A makes annual USD payments of 6% on a notional of USD 15 Mil

Question

Problem 8: Company A makes annual USD payments of 6% on a notional of USD 15 Million. Company A receives annual GBP payments of 7% on a notional of GBP 10 Million. Assume that the USD and GBP interest rates are ruso 496 and rGBP cash flow exchange will occur one year from today. If the current USD/GBP spot rate XUSD/GBP = 1.71 what is the value of this currency swap for company A? = 6%. The swap currently has 4 years until it matures. The next Problem 9: Duke Inc. is a major exporter of spicy American cheese products. Duke's financials are the following: VUSD-USD 15 Million ; NDuso-4 Million ; Assume that NDER = USD 3 Million are EUR-denominated, so NDUSB USD 1 Million. Assume that FX business exposure to the EUR is EUR = 180, Duke also has a short position on a 5-year fixed-for-fixed USD/EUR swap with a notional of USD 2 Million (assume this is an at-market swap). What is the FX equity exposure of Duke Inc.? USD Problem 10: Assume that the global beta of Krapl Inc. is 1.80, the local beta (relative to the u.S. market) is 1.95. The currency risk premium is 1.30%, the global market risk premium is 7%, the U.S. market risk premium is 5S%. The risk-free rate of return is 4% and Krapl Inc.'s FX equity exposure is 0.6, according to the International CAPM model. What is Krapl Inc's cost of capital based on the Global CAPM (GCAPM) model?

Explanation / Answer

Only 1st problem - 8:

Cash Outflow: 6% of 15,000,000 USD

Cash Inflow: 7% of 10,000,000 GBP

r_usd = 4% and r_gbp = 6% and current spot rate, r = USD/GBP = 1.71

In terms of next payment (1 year hence), the value of the above mentioned currency swap

Net Cash Inflow = Cash_Inflow*(1+r_gbp)*r - Cash_Outflow*(1+r_usd)

=> Net Cash Inflow = 0.07*10,000,000*(1+0.06)*1.71 – 0.06*15,000,000*(1+0.04)

=> Net Cash Inflow = 332820 USD (for 1st year)

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