Question

At time t, company A borrows 10 million euro at an interest rate of 3.2% p.a., paid semiannually, for a period of 2 years. It then enters into a 2-year swap at an exchange rate of USD/EUR 0.85. The swap rates are 6-month USD LIBOR, and 3.5% p.a. compounded semiannually in euro. What are the payments on the loan, on the swap and on the combination of them? Assume that 6-month LIBOR (annualized) evolves as follows:

t + 6	t + 12	t + 18	t + 24
3.2%	3.6%	4.0%	3.8%

Use the following table to provide your answer (use +/– to indicate the direction of the CF):

	Loan	Swap	Combination
t
t + 6
t + 12
t + 18
t + 24

Answer 1

Answer is as follows:

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