Company X wishes to borrow in USD at a fixed rate of interest and Company Y wishes to borrow in SGD at a fixed rate of interest. The companies can avail of the following interest rates per annum: SGD USD Company X 6.0% 8.0% Company Y 7.2% 8.4%

a. Design a swap that is equally attractive to both companies and will net a financial institution (FI) that acts as intermediary, 40 basis points per annum.

b. Suppose that the risk-free rate in Singapore is 2% for all maturities and 2.5% in the United States. The principals in the two currencies are USD 10 million and SGD 13.2 million The swap has a remaining life of four years and the current exchange rate is SGD 1.35 = USD 1. What is the value of the swap to Company X?