A US company (Company A) and a Brazilian company (Company B) have the following current borrowing terms in their short-term markets. Each desire 3-year loans. A needs Brazilian Real (BRL) for a Brazilian subsidiary and B needs USD for a US capital expansion. Because each is not known in the other's market, they face high costs. They hope a swap will lower their costs.

USDBRL

Company A4%10%

Company B9%5%

a.Both agree on a swap.A will borrow the principal for three years in USD from its outside lender.What rate will they pay?

b.B will borrow the principal in BRL for three years.What rate will they pay?

c.In the swap, GM agrees to take the BRL and pay B 7%.B agrees to take the USD and pay A 5.5%.

d.What will be the net borrowing costs for each company after the swap?

e.How much did each company save over directly borrowing in their respective markets? Diagram the flows between A and B and their respective outside lenders including rates.