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a) VaxAttax is an American firm that manufactures vaccines. For maximum effectiveness, the company strongly encourages everybody to get two doses, which, coincidentally, will generate twice as much revenue. VaxAttax financed production of the vaccine using a loan denominated in U.S. dollars (USD) but recently signed a contract to deliver vaccines to India, where there is a much larger population to jab. Pursuant to the contract, VaxAttax will be paid with Indian Rupees (INR). To hedge its currency exposure, VaxAttax would like to swap its loan into Rupees. The loan matures in one year and has a notional amount of USD 300 million with an annual coupon rate of 8%. The spot exchange rate is 75 INR/USD. The U.S. interest rate is 2% per year and the Indian interest rate is 12% per year, both of which are compounded annually. Design a swap (such that the initial value of the swap is zero) under which VaxAttax will make a single payment in Indian Rupees one year from now to satisfy its U.S. dollar denominated loan. What will VaxAttax receive from and pay to the swap dealer? (12 points)

b. If in one year the spot exchange rate changes to 70 INR/USD, does VaxAttax make money or lose money on the swap? Why? [No need for any calculations here. A brief explanation will suffice.] (4 points)

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