10

$

A

LIBOR

$ 8%

B

LIBOR + %

$8.20%

The current exchange rate is $1.60 = 1.00. Company "A" wishes to borrow $1,000,000 for

5 years and "B" wants to borrow 625,000 for 5 years.

a. You are a swap dealer. Quote A and B a swap that makes money equally for all three

parties and eliminates exchange rate risk for both A and B. Firms A and B are more

concerned with what currency that they borrow in than whether the debt is fixed or

floating. (5 marks)