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International Finance

3. In the Kodak Australian dollar swap example, suppose Merrill Lynch had been able to arrange a forward contract for the A $70 million at a rate of A $1 = U.S.$0.49.

a. If Merrill Lynch retained full benefits from the better forward rate, what would have been the present value of its profit on the deal?

b If Merrill Lynch had passed these savings on to Kodak, what would have been Kodak's annualized all-in rate on the swap? (Hint: Take the internal rate of return on all of Kodak's cash flows.)

c. Suppose the interest rate swap with Australian bank B had been at LIBOR - 20 basis points. If Merrill Lynch passed this higher cost along to Kodak, what would Kodak's all-in cost have been?

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a. If Merrill Lynch retained full benefits from the better forward rate, what would have been the present value of its profit on the deal?

ANSWER. At a forward rate of A $1 = U.S.$.49, Merrill Lynch would have paid out U.S.$34.3 million for A $70 million, instead of U.S.$37 million. The net savings of $2.7 million would have reduced its net outflow on May 12,1992 to $7.3 million. The new net present value of the swap to Merrill Lynch, using a 7% discount rate, compounded ...

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$2.19