A swap dealer quotes a euro midrate of 3.8175 percent (APR) in bond equivalent yield with quarterly compounding for a two-year yen-per-euro currency…

A swap dealer quotes a euro midrate of 3.8175 percent (APR) in bond
equivalent yield with quarterly compounding for a two-year yen-per-euro currency coupon
swap. The corresponding two-year yen rate is 2.9291 percent (APR) in quarterly
compounded bond equivalent yield. The dealer charges an annual fee of Ã‚Â±8bp (Ã‚Â±2bp per
quarter) around the euro swap mid-rate against yen three-month LIBOR flat. The swap
pricing schedule looks like this:
Currency Coupon Swap Pricing Schedule
Maturity Bid (in Ã¢â€šÂ¬) Ask (in Ã¢â€šÂ¬)
2 years 3.7375% 3.8975%
Quotes are against 1-year LIBOR Euroyen flat.
The spot exchange rate is Ã‚Â¥168.264/Ã¢â€šÂ¬.
PVIFA (present value interest factors for annuities) can be used to calculate present value of
annuities; multiply them by the coupon. Useful PVIFA include:
PVIFA(8 periods at the 3.8175%/4 = 0.954375% euro rate) = 7.66707456
PVIFA(8 periods at the 2.9291%/4 = 0.732275% yen rate) = 7.74268838
a. MTT Co. has Ã‚Â¥1,682,640,000 of two-year yen debt at a floating rate of three-month (Ã‚Â¥)
LIBOR + 88 bps (MMY), or LIBOR + 22 bps each three months. NTT wants to swap
this into fixed rate euros to fund its European operations. What is the all-in cost of
NTTÃ¢â‚¬â„¢s yen-for-euro currency coupon swap?
b. Verify this by calculating the internal rate of return on NTTÃ¢â‚¬â„¢s fully covered Ã‚Â¥/Ã¢â€šÂ¬ swap.
c. EuroAnalog, N.V. (EA) has Ã¢â€šÂ¬10 million of two-year fixed rate debt at 4.7508 percent in
bond equivalent yield (BEY). EA wants floating rate yen debt to fund its expansion into
Japan. Identify the all-in cost of EAÃ¢â‚¬â„¢s Ã‚Â¥/Ã¢â€šÂ¬ currency coupon swap.
d. Verify this cost by calculating the internal rate of return on EAÃ¢â‚¬â„¢s fully covered cash
flows.
e. What does the swap bank gain from these transactions? (in basis points EAR)

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