The correct answer is: Trek plc will pay 4.10% on $5.8 million and receive interest on £4 million at LIBOR, and at maturity the company will pay $5.8 million in exchange for receiving £4 million.

The company will use the cross-currency swap to change from paying variable rate interest in sterling to paying fixed rate interest in US dollars. In the swap it will pay 4.10% fixed interest on (£4 million x 1.45 $ per £) $5.8 million, and in return will receive sterling LIBOR on £4 million. At the end of the swap, there will be an exchange of principal in the same direction as the exchange of interest payments. The company will pay $5.8 million and receive £4 million. Net interest costs over the term of the swap, including the floating rate payment on the bank loan, will be:

– (sterling LIBOR +1%) + sterling LIBOR - (4.10% on dollars).

The company will therefore pay 4.10% fixed on US dollars and a further 100 basis points or 1% on £4 million sterling.