Omega is a U.S.-based automotive parts supplier. With annual sales of over $26 billion, the company has
Question:
Omega is a U.S.-based automotive parts supplier. With annual sales of over $26 billion, the company has expanded its markets far beyond the traditional automobile manufacturers in the pursuit of a more diversified sales base. As part of the general diversification effort, the company wishes to diversify the currency of denomination of its debt portfolio as well. Assume Omega enters into a $50 million 7-year cross currency interest rate swap to do just that – pay euro and receive dollars. Current swap and exchange rates are as follow:
Assumptions:
notional principal= $50,000,000
Spot Exchange rate, $/Euro= 1.1225
Swap rates:
US dollar: 7-year bid= 5.86% and 7-year ask=5.89%
Euros: 7-year bid= 4.01% and 7-year ask= 4.05%
a. Calculate all principal and interest payments in both currencies for the life of the swap.b.Assume that three years later Omega decides to unwind the swap agreement. If 4-year fixed rates of interest in euros have now risen to 5.35% and 4-year fixed rate dollars have fallen to 4.40%, and the current spot exchange rate of $1.0460/€, what is the net present value of the swap agreement? Who pays whom what amount?
Operations Management Creating Value Along the Supply Chain
ISBN: 978-0470525906
7th Edition
Authors: Roberta S. Russell, Bernard W. Taylor