Foxconn currently needs to borrow an additional NTD50 million for 6 years to expand

its business. It would cost 18.5 percent per year to borrow this amount in Taiwan, but

Foxconn can get a HKD-denominated loan at a fixed rate of 10 percent. However, this

would expose Foxconn to substantial currency risk. A 6-year currency swap is available

on the market where Foxconn would pay interest in NTD to the counterparty at 13.30

percent and receive interest in HKD from the counterparty at 8.20 percent. The current

exchange rate is 0.26 HKD/NTD.

If Foxconn enters into the HKD-NTD currency swap with a notional principal of

HKD13 million (= NTD 50 million), how much is the net HKD interest expense for each

year? Provide justification for your answer. (5 marks)