Delphi is the US-based automotive parts supplier that was spun off from General Motors in 2000. With annual sales of over $26 billion, the company has expanded its markets far beyond the traditional automobile manufacturers in the pursuit of a more diversified sales base. As part of the general diversification effort, the company wishes to diversify the currency of denomination of its debt portfolio as well. Assume Delphi enters into a $50 million seven-year cross-currency interest rate swap to do just that – pay euros and receive dollars. Using the data in Exhibit 9.10 in the text,
a. Calculate all principal and interest payments in both currencies for the lifew of the swap.
b. Assume that three years later Delphi decides to unwind the swap agreement. If four-year fixed rates of interest in euros have now risen to 5.35%, four-year fixed rate dollars have fallen to 4.40%, and the current spot exchange rate is $1.08/€, what is the net present value of the swap agreement? Who pays who what?
To calculate the principal and interest payments in both currencies for the life of the swap, you would need to gather the necessary information from Exhibit 9.10 in the text. Unfortunately, since I don't have access to that specific exhibit or the relevant data, I won't be able to provide you with the exact calculations. However, I can guide you on the general process of calculating these payments.
To calculate the principal and interest payments, follow these steps:
1. Determine the notional amount: In this case, the notional amount is $50 million.
2. Determine the interest rate for each currency: You will need to refer to Exhibit 9.10 to find the fixed interest rate for both euros and dollars. These rates are typically quoted as an annual percentage.
3. Calculate the fixed interest payments: Multiply the notional amount by the fixed interest rate for each currency to calculate the fixed interest payments in both euros and dollars.
4. Determine the exchange rate: The current spot exchange rate is given as $1.08/€. This means that for every euro, you will receive $1.08.
5. Convert the fixed interest payments from one currency to the other: Multiply the fixed interest payments in one currency by the exchange rate to convert them into the other currency. For example, if you have fixed interest payments in euros, multiply them by the exchange rate to convert them into dollars.
6. Calculate the principal payments: The principal payments are typically made at the end of the swap term. However, the specific details regarding the principal payments are not provided in your question. You would need to refer to the terms of the swap agreement, such as the amortization schedule, to calculate the principal payments.
Now, regarding the net present value (NPV) of the swap agreement given the change in interest rates and exchange rate three years later, here's how you can approach it:
1. Determine the new fixed interest rates: In this scenario, the four-year fixed rates for both euros and dollars have changed. The new rates are given as 5.35% for euros and 4.40% for dollars.
2. Calculate the present value of the future fixed interest payments: Discount the future fixed interest payments using the respective interest rates and time periods. This will give you the present value of the fixed interest payments in both euros and dollars.
3. Calculate the present value of the principal payments: Similar to the fixed interest payments, discount the future principal payments using an appropriate discount rate. Again, the specifics regarding the principal payments are not provided in your question.
4. Calculate the net present value: Subtract the present value of the future fixed interest payments and principal payments from the initial notional amount of $50 million. The NPV will depend on who has the higher present value of payments – Delphi or the counterparty. If the NPV is positive, then Delphi pays the counterparty; if it is negative, then the counterparty pays Delphi.
Please note that without the specific data from Exhibit 9.10, the calculations provided here are general guidelines. It's crucial to refer to the actual exhibit and the terms of the swap agreement for accurate calculations and analysis.