Question: At time t 3M borrows 12 8 billion at an interest

At time t, 3M borrows ¥12.8 billion at an interest rate of 1.2%, paid semiannually, for a period of two years. It then enters into a two-year yen/dollar swap with Bank of America (BA) on a notional principal amount of $100 million (¥12.8 billion at the current spot rate). Every six months, 3M pays BA U.S. dollar LIBOR6, while BA makes payments to 3M of 1.3% annually in yen. At maturity, BA and 3M reverse the notional principals. Assume that LIBOR6 (annualized) and the ¥/$ exchange rate evolve as follows:

a. Calculate the net dollar amount that 3M pays to BA (''−'') or receives from BA (''+'') in each six-month period.
b. What is the all-in dollar cost of 3M's loan?
c. Suppose 3M decides at t + 18 to use a six-month forward contract to hedge the t + 24 receipt of yen from BA. Six-month interest rates (annualized) at t + 18 are 5.9% in dollars and 2.1% in yen. With this hedge in place, what fixed dollar amount would 3M have paid (received) at time t + 24? How does this amount compare to the t + 24 net payment computed in Part a?
d. Does it make sense for 3M to hedge its receipt of yen from BA?Explain.

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