Problem $14\mathrm{.}8$

$12\mathrm{.}5$

points

A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates $25,000,000$ a year,

received in equivalent semiannual installments of $12,500,000.$ The British company wishes to convert the euro cash

flows to pounds twice a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can

convert the euros to pounds. The current exchange rate is $3\mathrm{.}4$ per pound. The fixed rate on a plain vanilla currency

swap in pounds is $9\mathrm{.}5$ percent per year, and the fixed rate on a plain vanilla currency swap in euros is $8\mathrm{.}5$ percent per

year.

Note: For all requirements, round the final answers to nearest whole dollar.

Required:

a$.$ Determine the notional principals in euros and pounds for a swap with semiannual payments that will help achieve

the objective.

b$.$ Determine the semiannual cash flows from this swap.

Complete this question by entering your answers in the tabs below.

Determine the notional principals in euros and pounds for a swap with semiannual payments that will help achieve the

objective.

Notional principal in Euro

Notional principal in GBP