Question

Monsanto needs to raise EUR50,000,000 and decides to raise this money by issuing dollar-denominated bonds and using a currency swap to convert the dollars to euros. The company expects interest rates in both the United States and the euro zone to increase.

1. Should the swap be structured with interest paid at a fixed or a floating rate?

2. Should the swap be structured with interest received at a fixed or a floating rate?

Answer 1

Answer A: Monsanto would pay the interest rate in euros. As it expects the interest rate in the Euro zone will increase in future, it should choose a swap with a fixed rate on the interest paid in euros so that increase in interest rate should not effect their payment

Answer B: Interest received Swap should be done at floating rate as the US interest rates are expected to increase and it would help in increasing the interest rate payments to the company received in US Dollars.

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