Two MNCs have mirror-image financing needs for their foreign direct investments: they need to borrow money for

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Question:

Two MNCs have mirror-image financing needs for their foreign direct investments: they need to borrow money for 8 years. The amount of borrowing is $2,900,000 or the € equivalent amount at the current spot rate of $1.3272/€. Both MNCs, despite of the same creditworthiness, are not well known in the international bond market, and thus pay higher interest rate for the foreign currency borrowing. The U.S. MNC pays 7% per annum to borrow euro, whereas the normal borrowing rate for firms of equivalent risk is 6% per annum. The EU MNC pays 9% per annum for dollar borrowing, whereas the normal dollar borrowing cost is 8% per annum for firms of equivalent risk. The 8-year swaps quotes are: USD: 8%-8.1% and EUR: 6%-6.1%.

(1) Summarize the interest payments resulting from the currency swap for the U.S. MNC

(2) Summarize the interest payments resulting from the currency swap for the EU MNC Assume one year after the initiation of the currency swap, the dollar interest rate has fallen to 6-6.15% per annum, the euro interest rate has fallen to 5.5-5.75% per annum, and exchange rate changed to $1.3343/€.

(3) Calculate the market value of the swap used by the U.S. MNC.

(4) Calculate the market value of the swap used by the EU MNC. (5) Which MNC would be willing to unwind its original swap contract? Explain with calculation.