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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

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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 a fixed rate 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 or a fixed rate bond in SF and exchange the proceeds for BP, also creating possible currency exposure. The companies face the following market interest rates. a BP Bond Market SF Bond Market British MNC 10% 11% Swiss MNC 11.50% 11.75% A swap bank dealer has agreed to organize a currency swap among the MNCs charging 14 % 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

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