$(5$ points$)$ A U$.$S$.$ MNC desires to finance a capital expenditure of is UK subsidiary. The project has

an economic life of five years, and the cost of the project is $10,000,000.$ The current spot exchange

rate in the spot market is $$1\mathrm{.}80/1\mathrm{.}00.$ The U$.$S$.$ MNC has the following two options:

$(1)$ Borrow $$18,000,000$ in the U$.$S$.$ capital market at a fixed rate of $9\%$ and convert the dollars to

pounds to pay the project cost.

$(2)$ Borrow $10,000,000$ in the UK capital market at a fixed rate of $7\%$ and pay the project cost.

A UK MNC of equivalent creditworthiness has a mirror$-$image finance need. It has a U$.$S$.$ subsidiary

in need of $$18,000,000$ to finance a capital expenditure with an economic life of five years. The

UK MNC has the following two options:

$(1)$ Borrow $10,000,000$ in the UK capital market at a fixed rate of $6\%$ and convert the pounds to

dollars to pay the project cost.

$(2)$ Borrow $$18,000,000$ in the U$.$S$.$ capital market at a fixed rate of $10\%.$

A swap bank offers the following quotes for USD and pounds:

USD Pounds

Bid Ask Bid Ask

$9\%9\mathrm{.}2\%6\%6\mathrm{.}2\%$

a$.$ Please draw the diagram to illustrate the swap.

b$.$ What are the savings or gains $($in $\%)$ for the US MNC$,$ the UK MNC$,$ and the swap bank,

respectively?