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