a U.S. MNC wants to finance a 20,000,000 expansion of a British plant. They could borrow dollars in the U.S. where they are well known and exchange for dollars for pounds. This would expose them to exchange rate risk: financing a sterling project with dollars. Another option would be to borrow pounds in the international bond market, but pay a premium since they are not as well-known abroad. If they can find a British MNC with a mirror image financing need, they may both benefit from a swap. If the spot exchange rate is ($/) = $1.50/, the U.S. firm needs to find a British firm wanting to finance dollar borrowing in the amount of $30,000,000. A is a U.S. based multinational and firm B is a U.K.based multinational. Both firms wish to finance a project in each others country of the same size. Their borrowing opportunities are given in the table below.

$

Company A 8.0% 11.5%

Company B 10.0% 12.0%

1. Design a swap that will net a bank, acting as intermediary, 30 basis points per annum. Make the swap equally attractive to the two companies and ensure that all foreign exchange risk is assumed by the bank.

2. Additionally, calculate the amount of funds circulating throughout the swap including the brokers share. Kindly draw the swap diagram.

3. Explain briefly why companies would want to engage in both interest rate and currency swaps.