Hedging Currency and Interest Rate Risks Using Swaps

XYZ Corporation, a U.S.-based manufacturer, anticipates receiving €5 million in six months from a European client. The company is concerned about potential fluctuations in the EUR/USD exchange rate and is considering using currency swaps to hedge its foreign exchange (FX) risk.

Simultaneously, XYZ has a floating-rate loan of $10 million that it wants to convert to a fixed-rate loan due to expected rising interest rates. The current 6-month LIBOR is 2.5%, and the company is considering an interest rate swap with a notional amount of $10 million to convert its floating interest payments to fixed payments.

Your task is to describe the strategy XYZ Corporation should employ to effectively hedge both its currency risk and interest rate risk. Discuss the structure of the proposed swap strategies, including the benefits and risks associated with each. Furthermore, explain how the characteristics of the currency swap and the interest rate swap would provide an optimal hedging outcome for XYZ.