True Life Inc., a US based company, has won a contract to implement a project in India. The project will require an initial investment of 8000…

(i) The following swap arrangement can be entered by True Life Inc. (1) Swap a US$ loan today at an agreed rate with any party to obtain Indian Rupees (₹) to make initial investment. (2) After one year swap back the Indian Rupees with US$ at the agreed rate. In such case the company is exposed only on the profit earned from the project. (ii) With the swap Year 0 (Million US$) Year 1 (Million US$) Buy 8000million at spot rate of 1 US$ = 80 (100.00) ----- Swap 8000 million back at agreed rate of 80 100.00 Sell 1600million at 1 US$ = 84 19.05 Interest on US$ loan @6% for one year (6.00) (100.00) 113.05 Net result is a net receipt of US$ 13.05 million. Without the swap Year 0 (Million US$) Year 1 (Million US$) Buy 8000million at spot rate of 1 US$ = 80 (100.00) Sell 9600 million at 1 US$ = 84 114.29 Interest on US$ loan @6% for one year (6.00) (100.00) 108.29 Net result is a net receipt of US$ 8.29 million. Decision: Since the net receipt is higher in swap option the company should opt for the same.