Martin Company Ltd can borrow in the United States for 9% while Manan Company has to pay 10% to borrow in the United States. Manan can borrow in Australia for 7%, while Martin Company Ltd has to pay 8% to borrow in Australia. Martin Company will be doi

To facilitate the fixed-for-fixed swap between Martin Company Ltd and Manan Company, we need to calculate the cash flows for both companies based on their borrowing rates, the amounts they wish to exchange, and the current exchange rate. ### Key Information: **Loan Terms:** - **Martin Company Ltd:** - Can borrow in the US for 9% (USD) - Can borrow in Australia for 8% (AUD) - **Manan Company:** - Can borrow in the US for 10% (USD) - Can borrow in Australia for 7% (AUD) **Amounts:** - Martin needs AUD 2,000,000. - Manan needs USD 1,000,000. **Exchange Rate:** - 1 USD = 2 AUD ### Step 1: Determine the amount each company can obtain and agree to pay in the swap. **For Martin Company Ltd:** - Amount to borrow in AUD: AUD 2,000,000 - Interest expenses (AUD): \(2,000,000 \times 8\% = 160,000 \) AUD per year. **For Manan Company:** - Amount to borrow in USD: USD 1,000,000 - Interest expenses (USD): \(1,000,000 \times 10\% = 100,000 \) USD per year. ### Step 2: Determine the Cash Flows Using the Swap Since they are entering into a swap, they will exchange principal and interest payments based on their respective borrowing rates. **For Martin Company Ltd:** - Receives USD 1,000,000 from Manan (paying 10%). - Pays AUD 2,000,000 to Manan (paying 8%). **For Manan Company:** - Receives AUD 2,000,000 from Martin (paying 8%). - Pays USD 1,000,000 to Martin (paying 9%). ### Step 3: Calculate Annual Cash Flows Over 5 Years Let's structure the cash flows based on the annual interest payments, assuming no principal repayments (purely interest payment basis for this example). #### Martin's Cash Flow from Swap: - Cash outflow to Manan: \(160,000\) AUD (interest on AU loan). - Cash inflow from Manan: \(100,000\) USD (interest received on US loan). #### Manan's Cash Flow from Swap: - Cash outflow to Martin: \(90,000\) USD (interest on US loan). - Cash inflow from Martin: \(160,000\) AUD (interest received on AU loan). ### Currency Exchange Rate Adjustment Visualising the swap cash flows in USD or AUD: 1. **Convert Manan’s interest payments to AUD:** - USD 100,000 × 2 AUD/USD = AUD 200,000 2. **Convert Martin’s interest payments to USD:** - AUD 160,000 / 2 AUD/USD = USD 80,000 Thus, the net cash flows for the swap and total payouts for one year are: ### Summary of Cash Flows per Company: 1. **Martin Company:** - Pays: AUD 160,000 (to Manan) - Receives: USD 100,000 (from Manan) 2. **Manan Company:** - Pays: USD 90,000 (to Martin) - Receives: AUD 160,000 (from Martin) ### Cash Flow Analysis Over 5 Years: - **Martin Total Cash from Swap (5 Years):** - Annual USD inflow from Manan = 100,000 USD × 5 = USD 500,000 - Annual AUD outflow to Manan = 160,000 AUD × 5 = AUD 800,000 - **Manan Total Cash from Swap (5 Years):** - Annual AUD inflow from Martin = 160,000 AUD × 5 = AUD 800,000 - Annual USD outflow to Martin = 90,000 USD × 5 = USD 450,000 **Conclusion:** Through this swap, both companies effectively optimize their financing costs and manage their funding needs in their respective market currencies over the duration of the swap.