1. A U.S. company needs to raise €50,000,000. It plans to raise this money by issuing dollar-denominated bonds and using a currency swap to convert the dollars to euros. The company expects interest rates in both the United States and the euro zone to fall.
(Please show your calculation and explanation)
According to the above question, this U.S Company expects the interest rate in the euro will fall. Hence, it would pay the interest rate in €. This company will receive the interest rate in $, because it expects the interest rate in United States will fall as well. Based on the analysis above, the U.S company should choose a SWAP with a floating rate on the interest paid in € to let the interest rate on its debt float down and choose a swap with a fixe rate on the interest received in $. For example, if the spot rate is 1€ = $1.2, the 6 month future interest rate is 1€ = $1.3 What is the conversion from the € to $ ?