German company and the swap dealer pays and receives under the swap contract that satisfies the...

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Finance

German company and the swap dealer pays and receives under theswap contract that satisfies the following:
? The same swap dealer is involved in this currency swap withthe US company and the German company.
? The US company’s net borrowing cost is 5.2% p.a. on $ and theGerman company’s net borrowing cost is 6.1% p.a. on €.
? The swap dealer pays and receives $ at 5.2% p.a.
(b) Suppose the US company has entered into a 5-year currencyswap with the swap dealer regarding the swap mentioned above. Theprincipal amounts are $15 million and €10 million. Suppose that theUS company declares bankruptcy at the end of year 3 just before theexchange of payment, when the exchange rate is $1.6/€. What is thecost to the swap dealer in US dollars? Assume that, at the end ofyear 3, the risk free interest rate is 4% per annum in US dollarsand 3% per annum in euros for all maturities. All interest ratesare quoted with annual compounding. Assume that the theoreticalforward exchange rates can be realized. Also assume there are 360days in a year.
Hint: In the event of default at the end of year 3, the swapdealer will not receive cashflows from the US company nor paycashflows to the US company. The cost of default to the dealer isthe value of the swap to the swap dealer if the US company had notdefaulted at Year 3.
Plz answer 2 sunb-question as a whole. thanks so much. willthumbsup if you did.

Answer & Explanation Solved by verified expert

4.4 Ratings (1093 Votes)

The swap dealer pays at 61 pa and receives at 52 pa Annual Payment by dealer 61 x Euro notional principal amount 61 x 10 million 610000 Annual receipt by dealer 52 x Dollar notional principal amount 52 x 15 million 780000 Spot rate for year 3 payments swap S 16 Expected spot rate for year 4 payments swap one year forward rate one year from now S x 1 r 1 r 16 x 1 4 1 3 16155 Expected See Answer

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German company and the swap dealer pays and receives under theswap contract that satisfies the following:? The same swap dealer is involved in this currency swap withthe US company and the German company.? The US company’s net borrowing cost is 5.2% p.a. on $ and theGerman company’s net borrowing cost is 6.1% p.a. on €.? The swap dealer pays and receives $ at 5.2% p.a.(b) Suppose the US company has entered into a 5-year currencyswap with the swap dealer regarding the swap mentioned above. Theprincipal amounts are $15 million and €10 million. Suppose that theUS company declares bankruptcy at the end of year 3 just before theexchange of payment, when the exchange rate is $1.6/€. What is thecost to the swap dealer in US dollars? Assume that, at the end ofyear 3, the risk free interest rate is 4% per annum in US dollarsand 3% per annum in euros for all maturities. All interest ratesare quoted with annual compounding. Assume that the theoreticalforward exchange rates can be realized. Also assume there are 360days in a year.Hint: In the event of default at the end of year 3, the swapdealer will not receive cashflows from the US company nor paycashflows to the US company. The cost of default to the dealer isthe value of the swap to the swap dealer if the US company had notdefaulted at Year 3.Plz answer 2 sunb-question as a whole. thanks so much. willthumbsup if you did.