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A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates €25,000,000 a...

A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates €25,000,000 a year, received in equivalent semiannual installments of €12,500,000. The British company wishes to convert the euro cash flows to pounds twice a year.  It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert the euros to pounds.  The current exchange rate is €1.5/£.  The fixed rate on a plain vanilla currency swap in pounds is 7.5 percent per year, and the fixed rate on a plain vanilla currency swap in euros is 6.5 percent per year.

a.  Determine the notional principals in euros and pounds for a swap with semiannual payments that will help achieve the objective.

b.  Determine the semiannual cash flows from this swap.

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