The centralia corporation in the U.S. manufacturer of small kitchen electrical appliance. I has decided to construct a wholly owned manufacturing facility in zaragoza, Spain, to manufacture microwave ovens for sale in the European Union. The plant is expected to cost 5,500,000 euros, and take about one year to complete, The plant is to be financed over its economic life of eight years. The borrowing capacity created byt his capital expenditure is $2,900,000 dollars; the reminder of the plant will be equity financed. Centralia is not well known in the Spanish or international bond market; consequently, it would have to pay 7 percent annum to borrow euros, whereas the normal borrrowing rate in the euro zone for well-known firms is equivalent risk is 6 percent. Alternatively, Centralia can borrow dollars in the US at a rate of 8 %,a) Suppose Spanish MNC has a mirror-image situation and needs $2,900,000 dollars to finance a capital expenditure of one of it US subisidiaries. It finds that it must pay a 9 percent fiexed-rate int he US for dollars, whereas it can borrow euros at 6 percent. The exchange rate has been forecast to be 1.33/euros1.00 in one year. Set up a currency swap that will benefit each counterparty.,b)Suppose that one year after the inception of the currency swap betwenn Centralia and the Spanish MNC, the US dollar fixed rate has fallen from 8 to 6 percent and the euro zone fixed rate for euros has fallen from 6 to 5.5 percent. In both dollar and euros, determine the market value of the swap if the exchage rate is $1.3343/1.00 euros
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