A British MNC needs to raise 132 million Swiss Francs (SF) to finance a project in Switzerland. The company can either issue a fixed rate SF denominated bond or an equivalent bond in British Pounds (BP) and exchange the proceeds for SF which creates possible currency exposure. The current exchange rate is BP = 1.32 SF. A Swiss MNC needs to raise 100 million BP to finance a project in Britain. The company could either issue a fixed rate BP denominated bond oran equivalent bond in SF, also creating possible currency exposure. The companies face the following market interest rates.

British MNC

10%- BP Bond Market

11%-SF Bond Market

Swiss MNC

11.50%-BP Bond Market

11.75%-SF Bond Market

A swap bank dealer has agreed to organize a currency swap among the MNCs charging % fees to structure this transaction.

a)What is the size of the Quality Spread Differential (QSD) involving the two MNCs? What does it capture?

b)Organize a swap agreement between the two MNCs.