Question 1: You have the following limited information upon which to base your decision as to which is the better of two alternative funding arrangements:
a) Alternative 1 is to arrange funding by using 3.25% YTM, five-year USD Eurocurrency loan with USD 10,000,000 principal value.
b) Alternative 2 is to arrange funding by using a 1.65% YTM, five-year zero-coupon currency option bond with principal repaid in USD or AUD at USD/AUD 1.05.
c) The premium on a five-year currency call option with strike of USD/AUD 1.05 is 0.0375 USD per AUD
1) Do Alternatives (a) and (b) provide the same value of payment at maturity? Assume that the exchange rate is USD/AUD 1.0225 at maturity.
2) Is it better to issue USD LIBOR or to issue the currency-option bond hedged with a call option on AUD?