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American X wishes to borrow U.S. dollars at a fixed rate of interest. Corporation Y wishes to borrow Japanese Yen at a fixed rate of

American X wishes to borrow U.S. dollars at a fixed rate of interest. Corporation Y wishes to borrow Japanese Yen at a fixed rate of interest. The amounts required by the two companies are the same at the current exchange rates. The following interest rates are listed adjusted for taxes:

Yen

Dollars

Company X

6.0%

9.10 %

Company Y

5.5%

11.20 %

Create a swap that will net a bank 40 basis points per annum. Make sure the swap is equally attractive to both companies and foreign exchange risk is assumed by the bank. Explain.

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