Problem
Tuscan Limited is an Australian company. Tuscan's CFO observes they can borrow in the US at 5% p.a. whereas to borrow locally would cost 8% p.a. They decide to borrow US$1 million for one year when the AUD/USD rate is 0.7000, and to hedge the FX risk with an FX swap.
A. How much USD is repayable in one year?
B. What would be the forward rate used in the swap?
C. How much AUD will be required to repay the debt?
D. What are the effective borrowing costs?