.G Co Ltd- a famous US based firm requires 10 million pound (GBP) by way of loan to finance a new venture in UK. But the firm being unknown to British investors is unable to get financing from UK debt market nor any UK bank. Hence, the firm decides to raise fund from US debt market through dollar-denominated 3 years’ bond at annual coupon of 10% PA. It will then convert the dollar ($) into GBP at prevailing spot rate of GBP/ $ = $1.70.
Over the each of next 3 years it plans to use the revenue earned in GBP from UK market out of new business to make its annual debt payment. G Co engages in currency swap agreement with a counter-party in which it will convert GBP to USD at an exchange rate of $1.70 per GBP at the end of each of next 3 years.
Answer the following questions –
a. How many dollars should G Co Ltd borrow initially to support new UK venture? (5 Marks)
b. How many pound should G specify in the swap agreement that will swap over each of the next 3 years in exchange of USD so that it can make its annual coupon payment to the US creditors? (5 Marks)