Currency and Interest Rate Swaps

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  1. Japanese investors purchased from Walt Disney Productions projected yen royalties. The 20-year stream of royalties is for Tokyo Disneyland. The present value of that stream of royalties, discounted at 5 percent (the return required by the Japanese investors), was ¥95 billion. Disney took the yen proceeds from the sale, converted them to dollars, and invested the dollars in bonds yielding 8 percent. At the time of the sale, the exchange rate was ¥79.8408 = $1.
    1. What amount (in dollars) did Disney realize from the sale of its yen proceeds?
    2. Describe the similarities and differences between Walt Disney's transaction and a currency/interest rate swap.

  2. Coca-Cola is considering entering into a currency swap involving $14 million of U.S. debt for an equivalent amount of euro debt. Assuming the swap matures in 10 years, the interest rate on Pfizer's outstanding 8-year dollar debt is 8% (paid semi-annually), the interest rate on the euro debt is 6 percent (paid semi-annually), and the current spot exchange rate is $1.24/€; structure a swap for Coca-Cola.

  3. IBM wants to swap out of $10,000,000 of fixed interest rate debt and into floating interest rate debt for 3 years. Assume the fixed interest rate is 7.625 percent and the floating rate is dollar LIBOR. What semiannual interest payments will IBM receive and what will IBM pay? (Hint: A table of interest paid and received by IBM and the financial institution will help).

Your answers must be presented in a Word document; if you do any calculations in Excel, copy and paste them from Excel into the Word document.  Make sure your responses are clearly marked so your instructor knows which questions your responses are answering.  Written comments must be formatted in conformity with CSU-Global Guide to Writing and APA Requirements (Links to an external site.).

For numerical answers, briefly show or explain how you arrived at your solutions to get partial credit if one or more answers are incorrect.

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