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Swap agreement

Swap Agreement. Grant, Inc. is a well-known U.S. firm that needs to borrow 10 million British pounds to support a new business in the United Kingdom. However, it cannot obtain financing from British banks because it is not yet established within the United Kingdom. It decides to issued dollar-denominated debt (at par value) in the United States, for which it will pay and annual coupon rate of 10 percent. It then will convert the dollar proceeds from the debt issue into British pounds at te prevailing spot rate (the prevailing spot rate is one pound = $1.70). Over each of the next three years, it plans to use the revenue in pounds from the new business in the United Kingdom to make its annual debt payment. Grant, Inc., engages in a currency swap in which it will convert pounds to dollars at an exchange rate of $1.70 per pound at the end of each of the next three years. How many dollars must be borrowed initially to support the new business in the United Kingdom? How many pounds sould Grant, Inc., specify in the swap agreement that it will swap over each of the next three years in exchange for dollars so that it can make it annual coupon payments to the U.S. creditors?

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The company will need to borrow US$ 17 million (10million pounds*1.7) to support the new business. ...

Solution Summary

How many dollars must be borrowed initially to support the new business in the United Kingdom? How many pounds sould Grant, Inc., specify in the swap agreement that it will swap over each of the next three years in exchange for dollars so that it can make it annual coupon payments to the U.S. creditors?

$2.19