Question: CCC Canada is setting up a plant in Germany and needs to borrow $2.7 equivalent Euros for 4 years. In Germany, it would have to pay 7% to borrow. However CCC prefers obligations in Canadian Dollar. CCC has approached a swap dealer .The Canadian interest rate is 8% and the spot rate is C$1.28/€.
a. Set up a Currency Swap for CCC Canada. Identify the Notional Principal and the year by year cash flow arising out of the swap.
b. Suppose after two years the Canadian $ interest rate has fallen from 8% to 6% and the Euro zone interest has fallen from 7% to 5.5%. CCC Canada wants to terminate the swap contract. Determine how the swap will be settled if the exchange rate at that time turns out to be $1.30/€.