Question
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow 1,000,000 for five years
A is a U.S.-based MNC with AAA credit; B is an Italian firm with AAA credit. Firm A wants to borrow 1,000,000 for five years and B wants to borrow $2,000,000 for five years. The spot exchange rate is $2.00 = 1.00, a swap bank makes the following quotes for 5-year swaps for AAA-rated firms against USD LIBOR.
USD | Euro | |||||||||||||||
Bid | Ask | Bid | Ask | |||||||||||||
4.00% | 4.20% | 1.80% | 1.90% | |||||||||||||
The firms' external borrowing opportunities are
borrowing | $ borrowing | ||||||
A | 2.7% | $ | 4.0% | ||||
B | 1.8% | $ | 5.0% | ||||
Is there a mutually beneficial swap?
Group of answer choices
None of the options are correct.
Yes, Firm A swaps with the swap bank, $ at bid and at ask. Firm B swaps with the swap bank, $ at ask and at bid. Firms A and B would each save 80bp and the swap bank would earn 30bp.
There is no mutually beneficial swap at these prices.
Yes, Firm A swaps with the swap bank, $ at ask and at bid. Firm B swaps with the swap bank, $ at bid and at ask. Firms A and B would each save 80bp and the swap bank would earn 30bp.
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