Question

1. Aron Company enters into a 2-year US$ / Euro swap with Brun Inc. on a notional principal amount of Euros 10 million (US$11 million at current spot rate). Aron agrees to pay Brun 5% semi-annually in Euros. Brun Inc agrees to pay US$ LIBOR6 +50 bps semi-annual rate. Based on the following market data, calculate the net Euro payment from Aron Co. (10 marks) LIBOR U SS / Euro spot Net s receipt/ (payment) IT + 6mos T + 12 mos T + 18 mos T + 24 mos 4.75% 4.95% 5.00% 4.90% 1.1000 1.1050 1.1500 1.1800 1.1600

Answer 1

E6 fa =E16-D6 B C D 2 Interest Expense for Brun Inc to be paid to Aron Co. 3 Amount in USD $ 11,000,000 Actual Interest | Interest | Net $ receipt / LIBORG 4 Time Rate Amount in USD (payment) 5 T 6 T +6mos 7 T +12mos 8 T +18mos 9 T +24mos 10 4.75% 4.95% 5.00% 4.90% 5.25% $ 5.45% $ 5.50% $ 5.40% $ 577,500 599,500 605,000 594,000 $ $ $ $ (25,000) (24,500) (15,000) (14,000) 11 12 Interest Expense for Aron Co. to be paid to Brun Inc. 13 Amount in Euros € 10,000,000 US Interest Rate Interest Amount Interest Amount "US$ / Euro Spot in Euro in USD 14 Time 15 T 16 T +6mos 17 T +12mos 18 T +18mos 19 T +24mos 20 1.1 1.105 $ 1.15 $ 552,500 575,000 5.00% € 5.00% € 5.00% € 5.00% € 500,000 500,000 500,000 500,000 1.16 $ 580,000

E21 fic A 2 Interest Expense for Brun Inc to be paid 1 3 Amount in USD =10000000*D15 LIBOR6 Actual Interest Rate Interest Amount in USD Net $ receipt/ (payment) 0.0475 4 Time 5 T 6 T + 6mos 7 T +12mos 8 T +18mos 9 T + 24mos 0.0495 =B6+0.005 =B7+0.005 =B8+0.005 =B9+0.005 =$C$3*C6 =$C$3*C7 =$C$3*C8 =$C$3*C9 =E16-06 =E17-07 =E18-D8 =E19-D9 0.05 0.049 10 11 12 Interest Expense for Aron Co. to be paid 13 Amount in Euros 10000000 US Interest Rate Interest Amount in Euro US$ / Euro Spot Interest Amount in USD 14 Time 15 T 16 T +6mos 17 T +12mos 18 T +18mos 19 T +24mos 1.1 1.105 1.15 10.05 =$C$13*B16 =$C$13*B17 =$C$13*B18 =$C$13*B19 =C16*D16 =C17*D17 =C18*D18 =C19*D19 1.18 1.16

For any query or clarification, please leave a comment.