Question: Consider a 2-year currency swap between USD and EUR involving floating rates only. The EUR benchmark is selected as 6-month Euro LIBOR, the dollar benchmark is 6-month BBA LIBOR. You also have the following information:
Notional amount = USD10,000,000
Exchange rate EUR/USD = 0.84
a. Show the cash flow diagrams of this currency swap. Make sure to quantify every cash flow exactly (i.e., use a graph as well as the corresponding number).
b. Show that this currency swap is equivalent to two floating rate loans.
c. Suppose a company is trying to borrow USD10,000,000 from money markets. The company has the following information concerning available rates on 6-month loans: EUR LIBOR = 5.7%, USD LIBOR 5 6.7% EURUSD currency swap spread: 1 year-75, 2 years-90. Should this company borrow USD directly? Would the company benefit if it borrowed EUR first and then swapped them into USD?