Question

At time t, company A borrows 128 million yen at an interest rate of 1.2% p.a., paid semiannually, for a period of 2 years. It then enters into a 2-year swap at an exchange rate of JPY/USD 128. The swap rates are 6-month USD LIBOR, and 1.3% p.a. compounded semiannually in yen.

What are the payments on the loan, on the swap and on the combination of them? Assume that 6-month LIBOR (annualized) evolves as follows:

t + 6 /5.4%

t + 12 /5.3%

t + 18 /5.9%

t + 24 /5.8%

Use the following table to provide your answer (use +/- to indicate the direction of the CF):

Loan /Swap /Combination

t

t + 6

t + 12

t + 18

t + 24

Answer 1

At time t, company A borrows 128 million yen at an interest rate of 1.2% p.a., paid semiannually, for a period of 2 years. It then enters into a 2-year swap at an exchange rate of JPY/USD 128. The swap rates are 6-month USD LIBOR, and 1.3% p.a. compounded semiannually in yen.