2. Tom Ltd has borrowed 2 million USD by issuing debentures which mature in exactly five years at a coupon rate of 6% p.a. paid semi-annually. Jerry Ltd has borrowed 2.6 million EUR for five years at the floating rate of six-month ESTR plus 1.0% p.a., with semi-annual interest payments.

Tom has income, which is essentially floating rate EUR, whilst Jerry has predominantly fixed rate USD income. Accordingly, Tom and Jerry have approached you as a swap dealer and requested that you arrange for an on-market swap that will reduce both their exchange rate and interest rate risk.

The following data has been gathered:

USD/EUR spot rate: 1 USD = 1.3 EUR

Five-year swap mid-rate: 8.0% p.a. USD against 6-month EUR ESTR flat.

4.0% p.a. EUR against 6-month EUR ESTR flat.

For dealer pays fixed rate subtract 3 basis points,

for dealer receives fixed add 3 basis points.

i) Diagram the interest and income flows for a swap that would meet their requirements.

ii) If, in exactly six months' time, the exchange rate was 1 USD = 1.38 EUR, what would be Jerry's net interest payments (as a result of the swap and direct borrowing) on that date?